Assurant - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

One Chase Manhattan Plaza, 41st Floor
New York, New York 10005
(212) 859-7000
(Address, including zip code, and telephone number, including
area code, of Registrant’s Principal Executive Offices)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No þ

     The number of shares of the registrant’s Common Stock outstanding at November 1, 2005 was 130,897,030.

 

 

See the accompanying notes to the consolidated financial statements

See the accompanying notes to the consolidated financial statements

See the accompanying notes to the consolidated financial statements

See the accompanying notes to the consolidated financial statements

See the accompanying notes to the consolidated financial statements

     Assurant, Inc. (formerly Fortis, Inc.) (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and selected international markets. Prior to the Initial Public Offering (“the IPO”) Fortis, Inc. was incorporated in Nevada and was indirectly wholly owned by Fortis N.V. of the Netherlands and Fortis SA/NV of Belgium (collectively, “Fortis”) through their affiliates, including their wholly owned subsidiary, Fortis Insurance N.V.

     On February 5, 2004, Fortis sold approximately 65% of its ownership interest in Assurant, Inc. via the IPO and retained approximately 35% of its ownership (50,199,130 shares). In connection with the IPO, Fortis, Inc. was merged into Assurant, Inc., a Delaware corporation, which was formed solely for the purpose of the redomestication of Fortis, Inc. After the merger, Assurant, Inc. became the successor to the business, operations and obligations of Fortis, Inc. Assurant, Inc. is traded on the New York Stock Exchange under the symbol AIZ.

     The following events occurred in connection with the Company’s IPO: The Company (1) redeemed the outstanding $196,224 of mandatorily redeemable preferred securities in January 2004, (2) issued 68,976 shares of Common Stock of Assurant, Inc. to certain directors and officers of the Company, and (3) issued 32,976,854 shares of Common Stock of Assurant, Inc. to Fortis Insurance N.V. simultaneously with the closing of the IPO in exchange for a $725,500 capital contribution based on the public offering price of the Company’s common stock. The Company used the proceeds of the capital contribution to repay the $650,000 of outstanding indebtedness under the $650,000 senior bridge credit facility and $75,500 of outstanding indebtedness under the $1,100,000 senior bridge credit facility. The Company repaid a portion of the $1,100,000 senior bridge credit facility with $49,500 in cash. On February 18, 2004, the Company refinanced $975,000 of the remaining $1,100,000 senior bridge credit facility with the proceeds of the issuance of two senior long-term notes (See Note 4).

     On January 21, 2005, Fortis owned approximately 36% (50,199,130 shares) of the Company based on the number of shares outstanding that day and sold 27,200,000 of those shares in a secondary offering to the public. The Company did not receive any of the proceeds from the sale of shares of common stock by Fortis. Fortis received all net proceeds from the sale. Fortis concurrently sold exchangeable bonds, due January 26, 2008, that are mandatorily exchangeable for their remaining 22,999,130 shares of Assurant. Fortis may elect, prior to the maturity date of the bonds, a cash settlement alternative and pay the bondholders an amount of cash equal to the applicable market value of the Company’s common stock. The exchangeable bonds and the shares of the Company’s common stock into which they are exchangeable have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

     Through its operating subsidiaries, the Company provides creditor-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, credit insurance, warranties and extended service contracts, individual health and small employer group health insurance, group dental insurance, group disability insurance, group life insurance and pre-funded funeral insurance.

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement of the financial statements have been included. Certain prior period amounts have been reclassified to conform to the 2005 presentation.

     Dollar amounts are in thousands, except for number of shares and per share amounts.

     The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation.

     Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The accompanying interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

     In December 2004, FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R’’) which replaces Statement of Financial Accounting Standards No. 123, Share-Based Payment and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. Under FAS 123R, the company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The permitted transition methods include either retrospective or prospective adoption. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented for all unvested stock options beginning with the first period presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of FAS 123R. In April 2005, the Securities and Exchange Commission approved a new rule for public companies which delays the effective date of FAS 123R. Under the new rule, public companies are required to adopt FAS 123R in the first annual period after June 15, 2005, and, therefore, the Company is required to adopt FAS 123R by the first quarter of 2006. Except for this deferral of the effective date, the guidance in FAS 123R is unchanged. The Company is currently evaluating the requirements of FAS 123R and the potential impact on the Company’s financial statements.

     In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements” (“FAS 154’’). FAS 154 changes the accounting and reporting of a change in accounting principle. Prior to FAS 154, the majority of voluntary changes in accounting principles were required to be recognized as a cumulative effect adjustment within net income during the period of the change. FAS 154 requires retrospective application to prior period financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005 but does not change the transition provisions of any existing accounting pronouncements. The Company does not believe the adoption of FAS 154 will have a material effect on the Company’s consolidated financial position or results of operations.

     Effective September 30, 2005, the Company changed the date of its annual goodwill impairment test to October 1st. Previously, the Company performed this annual goodwill impairment test on January 1st, with the most recent test occurring on January 1, 2005. The Company is now performing its annual business planning and forecasting in the fourth quarter of its fiscal year based on actual data through October 1st. The Company determined this change in accounting principle is preferable because it will allow management to incorporate this test into the normal flow of the financial planning and reporting cycle and provide more timely analysis on the recoverability of goodwill.

     In December 2003, the Company entered into two senior bridge credit facilities of $650,000 and $1,100,000. The aggregate indebtedness of $1,750,000 under the facility was in connection with the extinguishment of the Company’s Mandatorily Redeemable Preferred Securities. The $1,750,000 aggregate indebtedness under the senior bridge credit facility was paid in full in February 2004.

     In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000. The Company received net proceeds from this transaction of $971,537, which represents the principal amount less the discount. The discount will be amortized over the life of the notes. The first series is $500,000 in principal amount, bears interest at 5.63% per year and is payable in a single installment due February 15, 2014 and was issued at a 0.11% discount. The second series is $475,000 in principal amount, bears interest at 6.75% per year and is payable in a single installment due February 15, 2034 and was issued at a 0.61% discount. Interest on the senior notes is payable semi-annually on February 15 and August 15 of each year. The senior notes are unsecured obligations and rank equally with all of the Company’s other senior unsecured indebtedness. The senior notes are not redeemable prior to maturity. The senior notes were registered with the Securities and Exchange Commission in 2004 and all of the holders exchanged their notes for the new, registered notes.

     The interest expense incurred related to the senior notes was $15,047 for the three months ended September 30, 2005 and 2004, respectively, and $45,141 and $37,116 for the nine months ended September 30, 2005 and 2004, respectively. The Company made interest payments of $30,094 on February 15, 2005 and August 15, 2005, respectively.

     The Company maintains a $500,000 commercial paper program, which is available for working capital and other general corporate purposes. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities at their level. This program is backed up by a $500,000 senior revolving credit facility with a syndicate of banks arranged by J.P. Morgan Securities, Inc. (successor by merger to Banc One Capital Markets, Inc.) and Citigroup Global Markets, Inc., which was established on January 30, 2004. In April 2005, the Company amended and restated its $500,000 senior revolving credit facility with a syndicate of banks arranged by Citibank and JP Morgan Chase Bank. The amended and restated credit facility is unsecured and is available until April 2010, so long as the Company is in compliance with all the covenants. This facility is also available for general corporate purposes, but to the extent used thereto, would be unavailable to back up the commercial paper program. On February 3, 2005, July 13, 2005 and September 9, 2005, the Company used $40,000, $40,000 and $15,000 respectively, from the commercial paper program for general corporate purposes, which was repaid on February 17, 2005, July 27, 2005 and September 23, 2005, respectively. There were no amounts relating to the commercial paper program outstanding at September 30, 2005. The Company did not use the revolving credit facility during the nine months ended September 30, 2005 and no amounts are currently outstanding.

     The revolving credit facility contains restrictive covenants. The terms of the revolving credit facility also require that the Company maintain certain specified minimum ratios and thresholds. The Company is in compliance with all covenants and the Company maintains all specified minimum ratios and thresholds.

   Long-Term Incentive Plan

     Restricted Stock

     The Long-Term Incentive Plan authorizes the granting of awards to employees, officers, and directors. The expense recorded related to restricted stock was $969 and $200 for the three months ended September 30, 2005 and 2004, respectively, and $1,573 and $809 for the nine months ended September 30, 2005 and 2004, respectively.

     Stock Appreciation Rights Plan

     On April 7, 2005, the Company approved an amendment to the Stock Appreciation Rights Plan (“SARs Plan”). The amendment, which was effective June 30, 2005, amended the plan from one that paid appreciation to participants in the form of cash to a plan that pays appreciation to participants in the form of company stock. As a result of the amendment, 2,696,764 Assurant, Inc. rights and 545,744 business unit rights under the previous plan were converted into 4,677,437 rights under the amended SARs Plan at June 30, 2005. The intrinsic value of the converted rights did not change from that of the existing rights under the previous plan. Of the converted rights, approximately 44% are fully vested. The remainder will become fully vested over the next two years in accordance with their original vesting period. The conversion of the existing rights under the previous plan to the amended SARs Plan resulted in a $43,775 reclass of a liability to additional paid-in capital at June 30, 2005.

     Additional grants were made subsequent to the conversion of the SARs Plan. The Company granted rights totaling 13,497 to its board of directors, all of which vested immediately. Of these rights, 11,921 rights have an exercise price of $35.25 and the remaining 1,576 rights have an exercise price of $38.08. The Company also granted rights totaling 1,431,220 to certain Company executives. Of these rights, 1,392,145 have an exercise price of $35.64 and the remaining 39,075 rights have an exercise price of $38.08. These rights have a three year cliff vesting period beginning January 1, 2005.

     Until adoption of FAS 123R (see Note 3), the Company will continue to account for the SARs Plan as a variable plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its interpretations. The SARs Plan meets the requirements for a compensatory plan, and accordingly the Company records an expense based on the intrinsic value.

   Executive 401K Plan

     During 2005, the Company purchased 12,900 treasury stock for $438 via a Rabbi Trust which was allocated to the Assurant Stock Fund. Effective September 2005, the Assurant Stock Fund was dissolved and the Company’s stock will no longer be offered to participants of the Executive 401K Plan. As a result, the remaining shares in the plan were placed in Treasury Stock and proceeds of approximately $1,515 were used by the plan administrator to replace the participants’ stock with money market funds.

   Employee Stock Purchase Plan

     The Company established an Employee Stock Purchase Plan (“ESPP”) which went into effect on July 1, 2004. In January 2005, the Company issued 71,860 shares to employees relating to the ESPP at a price of $23.67 for the offering period of July 1 through December 31, 2004. In July 2005, the Company issued 77,017 shares to employees relating to the ESPP at a price of $27.63 for the offering period of January 1 through June 30, 2005.

     The Company accounts for the ESPP in accordance with APB 25 as a non-compensatory plan, and accordingly does not record any compensation expense.

   Pro-Forma Disclosure

     The following pro forma information of net income and net income per share amounts were determined as if the Company had accounted for the ESPP and SARs Plans under the fair value method of FAS 123. This disclosure is not equivalent to the impact the Company will incur upon adoption of FAS 123R at January 1, 2006. The Company is currently evaluating the requirements of FAS 123R and the potential impact on the Company’s financial statements.

     The following table shows the shares repurchased during the periods indicated:

     For the nine months ending September 30, 2005, the Company repurchased 7,418,426 shares of the Company’s outstanding stock at a cost of $266,439 pursuant to the August 2, 2004 publicly announced repurchase program. Total shares repurchased include 40,926 that were purchased as a part of the dissolution of the Executive 401K Plan in September 2005. See Note 5 — Stock Based Compensation.

     The components of net periodic benefits cost for the Company’s qualified pension benefits and post retirement plans for the three and nine months ended September 30, 2005 were as follows:

     During the first three months of 2005, the Company contributed $40,000 and zero to the qualified pension plan and the retirement health benefit plan, respectively. This is consistent with the Company’s projected contribution amounts disclosed in its 2004 Form 10-K. The Company made no other contribution during the nine months ended September 30, 2005. As a result of the $40,000 cash contribution to its qualified pension plan, the Company reversed $28,086, net of tax, representing a portion of the minimum pension liability, which was previously recorded in accumulated other comprehensive income. An additional minimum pension liability of $9,485, net of tax, related to the non-qualified plan, remains within accumulated other comprehensive income.

     The Company’s nonqualified plans are unfunded. The net periodic costs were $2,931 and $3,997 for the three months ended September 30, 2005 and 2004, respectively, and $8,585 and $9,178 for the nine months ended September 30, 2005 and 2004, respectively.

     The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Health, Assurant Employee Benefits, Assurant Preneed, and Corporate and Other. Assurant Solutions provides credit insurance, including life, disability and unemployment, debt protection administration services, warranties and extended service contracts, creditor-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual, short-term and small group health insurance. Assurant Employee Benefits provides employee and employer paid dental, disability, and life insurance products and related services. Assurant Preneed provides life insurance policies and annuity products that provide benefits to fund pre-arranged funerals. Corporate and Other includes activities of the holding company, financing expenses, net realized gains (losses) on investments and interest income earned from short-term investments held. Corporate and Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

     The Company evaluates performance of the operating business segments based on segment income after-tax excluding realized gains (losses) on investments. The Company determines reportable segments in a manner consistent with the way the Company organizes for purposes of making operating decisions and assessing performance.

     On June 21, 2005, the Company announced its intention to separate Assurant Solutions into two businesses — Assurant Specialty Property and Assurant Solutions. The Company will begin reporting separate segment financial information sometime in 2006 upon completion of the separation of the underlying product lines.

     During the third quarter of 2005, the Company made a change to the structure of its reportable segments. American Bankers Insurance Group (“ABIG”) was purchased by the Company in August 1999. A subsidiary of ABIG, American Reliable Insurance Company (“ARIC”) participated in certain excess of loss reinsurance programs in the London market between 1995 and 1997. ARIC ceased reinsuring such business in 1997; however, certain risks continue beyond 1997 due to the nature of the reinsurance contracts written. During the third quarter of 2005, significant developments occurred in resolving certain disputes related to these excess of loss reinsurance programs. All 2005 activities related to the excess of loss reinsurance programs are now being managed by and are reflected in the Corporate & Other segment. Policyholder benefits of $7,795 previously reported in the Assurant Solutions segment during the second quarter of 2005 have been reclassified to the Corporate & Other segment and are included in the results for the nine months ended September 30, 2005.

     The following tables summarize selected financial information by segment:

     In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. The Company had $41,899 of letters of credit outstanding as of September 30, 2005.

     The Company is regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the Company’s current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, the Company does not believe that any pending matter will have a material adverse effect on the Company’s financial condition or results of operations.

     The Solutions segment is subject to a number of pending actions, primarily in the State of Mississippi, many of which allege that the Company’s credit insurance products were packaged and sold with lenders’ products without buyer consent. The judicial climate in Mississippi is such that the outcome of these cases is extremely unpredictable. The Company has been advised by legal counsel that the Company has meritorious defenses to all claims being asserted against the Company. The Company believes, based on information currently available, that the amounts it has accrued are adequate.

     In addition, American Reliable Insurance Company (“ARIC”), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers. Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes.

     Many of the disputes involving ARIC and an affiliate, Bankers Insurance Company Limited (“BICL”), relating to the 1995 and 1997 program years, have been resolved by settlement or arbitration. As a result of the settlements and an arbitration (in which ARIC did not prevail) additional information became available in 2005, and based on management’s best estimate, the Company increased its reserves and recorded a total pre-tax charge of $54,148 and $61,943 for the three and nine months ended September 30, 2005, respectively. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes. The Company believes, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.

     The Company was notified on August 26, 2004 that one of our employees is being investigated by the criminal division of the Internal Revenue Service (“IRS”) for responses he made to questions he was asked by the IRS relating to an approximately $18,000 tax reserve taken by the Company in 1999. At this stage, it would be speculative to predict the outcome of this investigation. However, it could result in a fine assessed against the employee and the Company, negative publicity for the Company or more serious sanctions.

     As disclosed in the Risk Factors section of the Company’s 2004 Annual Report on Form 10-K, one of the Company’s reinsurers thinks the Company should have been accounting for premiums ceded to them as a loan instead of as an expense. Based on the Company’s investigation to date into this matter, the Company has concluded that there was a verbal side agreement with respect to one of the Company’s reinsurers under its catastrophic reinsurance program. While management believes that the difference resulting from the appropriate alternative accounting treatment would be immaterial to the Company’s financial position or results of operations, regulators may reach a different conclusion. In 2004, 2003 and 2002, premiums ceded to this reinsurer were $2,600, $1,500 and $500, respectively, and losses ceded were $10,000, $0, and $0, respectively. This contract expired in December of 2004 and was not renewed.

     As part of ongoing, industry-wide investigations, the Company has previously received subpoenas for information from the United States Securities and Exchange Commission and the United States Attorney for the Southern District of New York. The areas of inquiry addressed to the Company include “certain loss mitigation products” and documents relating to the use of finite risk insurance. The Company has conducted an evaluation of the transactions that could potentially fall within the scope of the subpoenas, as defined by the authorities, and has provided information as requested. The Audit Committee of the Company’s Board of Directors, with the assistance of independent counsel, has completed its investigation of the matters raised by the subpoenas.

     The Audit Committee has not found any wrongdoing on the part of any current officers of the Company. The Audit Committee could re-open its investigation should additional facts come to its attention that justify doing so. The Company has enhanced its internal controls regarding reinsurance and will continue to further evaluate their effectiveness. The Company recently learned that two current employees of a subsidiary have received subpoenas requesting testimony before a grand jury of the United States District Court for the Southern District of New York regarding the above mentioned matter.

     As a result of recent public announcements, the Company expects to incur expenses related to State assessments. Assessments are expected to cover insolvencies of other insurance companies that suffered significant insurance losses during the 2005 hurricane season. At this time, the amount of these assessments is not estimable. Therefore, the Company has not recorded a liability related to this matter for the 2005 hurricane season.

     On November 11, 2005, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to an additional $400,000 of its outstanding common stock. The repurchase program may utilize open market and/or private transactions to facilitate the repurchase. The amount and timing of the repurchases will depend upon market conditions.

     On November 11, 2005, the Company announced that the Board of Directors declared a quarterly dividend of $0.08 per common share. The dividend will be payable on December 12, 2005 to stockholders of record as of November 28, 2005.

     On November 9, 2005, the Company signed an agreement with Forethought Life Insurance Company (“Forethought”) whereby the Company will discontinue writing new Preneed insurance policies in the United States via independent funeral homes and independent funeral home chains. Assurant Preneed distributes products through three distribution channels: Independent — United States and Independent — Canada, which distribute through independent funeral homes and selected third party general agencies and the American Memorial Life Insurance Company (“AMLIC”) which distributes through an exclusive relationship with Service Corporation International. As part of the agreement, Assurant Preneed’s Independent — United States account executives will partner with Forethought to transition the Company’s future Independent — United States funeral home sales customers to Forethought’s Preneed products. The Company will receive payments from Forethought over the next ten years based on the amount of business the Company transitions to Forethought. This agreement does not impact Assurant Preneed’s Independent — Canada or AMLIC distribution channels. The Company estimates that the transaction will not have a material impact on the Company’s consolidated financial position or results of operations. The Company has not completed its assessment of the effect this agreement may have on the remaining goodwill balance held by Assurant Preneed at the time of this filing.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of Assurant, Inc. and its subsidiaries (which we refer to collectively as Assurant) as of September 30, 2005, compared with December 31, 2004, and our results of operations for the three and nine months ended September 30, 2005 and 2004. This discussion should be read in conjunction with our MD&A and annual audited financial statements as of December 31, 2004 included in our Form 10-K for the year ended December 31, 2004 filed with the U.S. Securities and Exchange Commission and the September 30, 2005 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q.

     Some of the statements in this MD&A and elsewhere in this report may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in this report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity.

     Assurant is a premier provider of specialized insurance products and related services in North America and selected international markets. The four business segments — Assurant Solutions; Assurant Health; Assurant Employee Benefits; and Assurant Preneed — have partnered with clients who are leaders in their industries and have built leadership positions in a number of specialty insurance market segments in the U.S. and selected international markets. The Assurant business segments provide creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration services; credit insurance including life, disability and unemployment; warranties and extended services contracts; individual, short-term and small employer group health insurance; group dental insurance; group disability insurance; group life insurance; and pre-funded funeral insurance.

     The following is a discussion of the process by which we determine our reserves for our major long duration product line.

     Reserves for future policy benefits are recorded as the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions are

selected using best estimates for expected expenses, investment yield, inflation, mortality and withdrawal rates. These assumptions reflect current trends and are based on our experience and include a provision for possible unfavorable deviation. An unearned revenue reserve is also recorded which represents the balance of the excess of gross premiums over net premiums that is still to be recognized as income in future years in a constant relationship to insurance in force.

     Loss recognition and recoverability testing is performed annually and reviewed quarterly. Such testing involves the use of best estimate assumptions to determine if the net liability position (all liabilities less Deferred Acquisition Costs (“DAC”) exceeds the minimum liability needed. Any premium deficiency would first be addressed by removing the provision for unfavorable deviation. To the extent a premium deficiency still remains, it would be recognized immediately by a charge to the statement of operations and a corresponding reduction in DAC. Any deficiency in excess of DAC would be recognized as a premium deficiency reserve. There were no premium deficiencies recognized for the nine months ended September 30, 2005.

     For short duration contracts, claims and benefits payable reserves are recorded when insured events occur. The liability is based on the expected ultimate cost of settling the claims. The claims and benefits payable reserves include (1) case reserves for known but unpaid claims as of the balance sheet date; (2) incurred but not reported (“IBNR”) reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our case reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.

     Case or claim reserves are set for active individual claims on group disability policies and for disability waiver of premium benefits on group term life policies. Assumptions considered in setting such reserves include disabled life mortality and claim termination rates (the rates at which disabled claimants come off claim, either through recovery or death), claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves.

     Factors considered when setting IBNR reserves include patterns in elapsed time from claim incidence to claim reporting, and elapsed time from claim reporting to claim payment.

     IBNR reserves represent the largest component of reserves estimated for claims and benefits payable in our Medical line of business, and we use a number of methods in their estimation, including the loss development method and the projected claim method for recent claim periods. We use several methods in our Medical line of business because of the limitations of relying exclusively on a single method. Loss development factors selected take into consideration claims processing levels, claims under case management, medical cost inflation, seasonal effects, medical provider discounts and product mix.

     Our Property and Warranty line of business includes creditor-placed homeowners, manufactured housing homeowners, credit property, credit unemployment and warranty insurance and some longer-tail coverages which we no longer write (e.g. asbestos, environmental, other general liability and personal accident). Our Property and Warranty loss reserves consist of case reserves and bulk reserves. Bulk reserves consist of IBNR and development on case reserves. The method we most often use in setting our Property and Warranty bulk reserves is the loss development method. Under this method, we estimate

ultimate losses for each accident period by multiplying the current cumulative losses by the appropriate loss development factor. We then calculate the bulk reserve as the difference between the estimate of ultimate losses and the current case-incurred losses (paid losses plus case reserves). We select loss development factors based on a review of historical averages, and we consider recent trends and business specific matters such as current claims payment practices.

     We may use other methods depending on data credibility and product line. We use the estimates generated by the various methods to establish a range of reasonable estimates. The best estimate of reserves is selected from the middle to upper end of third quartile of the range of reasonable estimates.

     We utilize ceded reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions, for client risk and profit sharing.

     As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various business segments, including significant individual or catastrophic claims, which enables us to free up capital to allow us to write additional business.

     For those product lines where there is exposure to catastrophes, we closely monitor and manage the aggregate risk exposure by geographic area, and we have entered into reinsurance treaties to manage exposure to these types of events.

     Under indemnity reinsurance transactions in which we are the ceding insurer, we remain liable for policy claims if the assuming company fails to meet its obligations. To minimize this risk, we have control procedures to evaluate the financial condition of reinsurers and to monitor the concentration of credit risk. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser degree, diversification as well as developing strong relationships with our reinsurers for the sharing of risks.

     To exit certain businesses, we have used reinsurance to facilitate the transaction because the businesses share legal entities with business segments that we retain. Assets backing liabilities ceded relating to these businesses are held in trusts, and the separate accounts relating to divested business are still reflected in our balance sheet.

     The Assurant Solutions segment writes business produced by its clients, such as mortgage lenders and servicers and financial institutions, and reinsures all or a portion of such business to insurance subsidiaries of the clients. Such arrangements allow significant flexibility in structuring the sharing of risks and profits on the underlying business.

     A substantial portion of Assurant Solutions’ reinsurance activities are related to agreements to reinsure premiums and risk related to business generated by certain clients to the client’s captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. Through these arrangements, our insurance subsidiaries share some of the premiums and risk related to client-generated business with these clients. When the reinsurance companies are not authorized to do business in our insurance subsidiary’s domiciliary state, our insurance subsidiary generally obtains collateral, such as a trust or a letter of credit, from the reinsurance company or its affiliate in an amount equal to the outstanding reserves to obtain full statutory financial credit in the domiciliary state for the reinsurance. Our reinsurance

agreements do not relieve us from our direct obligation to our insured. Thus, a credit exposure exists to the extent that any reinsurer is unable to meet the obligations assumed in the reinsurance agreements. To minimize our exposure to reinsurance insolvencies, we evaluate the financial condition of our reinsurers and hold substantial collateral (in the form of funds, trusts and letters of credit) as security under the reinsurance agreements.

     We sponsor a pension and a retirement health benefit plan covering our employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include the discount rate, expected return on plan assets and rate of future compensation increases. We determine these assumptions based upon currently available market and industry data, historical performance of the plan and its assets, and consultation with an independent consulting actuarial firm to aid us in selecting appropriate assumptions and valuing our related liabilities. The actuarial assumptions used in the calculation of our aggregate projected benefit obligation may vary and include an expectation of long-term market appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. The assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants.

     Our 2004 Form 10-K described the accounting policies that are critical to the understanding of our results of operations, financial condition and liquidity. The accounting policies described in the 2004 Form 10-K were consistently applied to the consolidated interim financial statements for the nine months ended September 30, 2005.

     As stated in our 2004 Form 10K, we adopted FAS 142, Goodwill and Other Intangible Assets, on January 1, 2002. As part of the adoption of FAS 142, we are required to test goodwill on at least an annual basis. We performed a January 1, 2005 impairment test during the first quarter and concluded that goodwill is not impaired. Effective September 30, 2005, the Company changed the date of its annual goodwill impairment test to October 1st. The Company determined this change in accounting principle is preferable because it will allow management to incorporate this test into the normal flow of the financial planning and reporting cycle and provide more timely analysis on the recoverability of goodwill.

     See — Financial Statement Footnote 3.

     The tables below present information regarding Assurant’s Consolidated segment results of operations: