For sale: Historic health insurance company with one million customers, $2 billion in revenue, some recent losses and mixed customer satisfaction, plus a modestly profitable voluntary benefits unit.
New York-based Assurant, Inc. is putting its health and employee benefits subsidiaries on the market, after a portfolio review left executives rethinking their place in the new healthcare economy.
The for-profit insurer said it will focus resources on its main business, "niche housing and lifestyle protection offerings," and is "exploring strategic alternatives for its employee benefits and health business segments, including the sale of each business." If Assurant cannot find a buyer for the health insurance business, with the help of investment bank Barclays Capital, the company plans to exit the segment next year.
"We have established significant momentum in our specialty housing and lifestyle protection businesses," said Assurant President and CEO Alan Colberg. "The health and employee benefits business segments possess differentiated capabilities in their respective markets, but we do not believe they can meet our return targets at the pace we require. While this is a difficult decision, we believe they would be strong assets for new owners that are focused more exclusively on healthcare and employee benefits."
Assurant Health comprises nearly 20 percent of the company's total revenue, but lost at least $80 million in the first quarter of this year--more than the $63 million lost in all of 2014. The other subsidiary up for auction, Assurant Employee Benefits, brought in net income of $48 million last year on voluntary products like life and dental insurance sold to workers at some 30,000 small and mid-size employers. That $48 million contributed to the firm's overall profit of $439 million, or $6 per share, which was down five percent from 2013.
Old insurer struggles in a new health economy
Assurant Health traces its lineage back to 1892, when the LaCrosse Mutual Aid Association was created in Wisconsin to sell disability insurance. In 1900, the company moved to Milwaukee, where it now has more than 1,000 employees, and changed its name to Time Insurance, one of its current health plan brands.
Time Insurance seized on the post-war boom, first selling group health insurance in 1946 and then major medical policies a decade later. In 1977, the insurer became part of the modern global economy when it was acquired by Netherlands-based AMEV Holdings, later known as Fortis. In 1998, the company became an even bigger small-group insurer with the acquisition of John Alden, another brand that still sells today. In 2004, the Fortis conglomerate spun off its U.S. insurance assets into Assurant, divided into speciality property, solutions, employee benefits and health.
Throughout the 1990s and 2000s, Assurant Health was a major and profitable player in individual and small group markets across the country, although it relied on what would become one of the industry's most notorious practices. "Our historical strength has been world-class risk management around underwriting," said then-CEO Robert Pollack, a 33-year Assurant veteran, in 2010.
Once a key to its profitability, Assurant's aggressive risk-based underwriting was not going to guarantee it success in the Affordable Care Act era. If anything, it may have been a liability to adapting to a market with guaranteed coverage and consumer protections. Some of the company's practices were also catching up with it.
In 2010, Assurant paid out $37 million in damages after a Colorado jury concluded that a former customer injured in car accident was wrongly denied payment of her healthcare bills; the insurer claimed the woman not disclosed a pre-existing condition when she bought the policy. Assurant also paid $10 million that year to a South Carolina customer whose coverage was cancelled when he tested positive for HIV. The lawsuit revealed that the insurer used a computer algorithm to find members with HIV and then look for reasons to terminate coverage.
In the two years since the ACA, Assurant Health has laid off around 200 employees. In 2011, Assurant Health's net income declined almost 25 percent to $40.9 million, as the company set aside $41 million to give back to its then-membership of 700,000 in rebates mandated by the ACA's 80 percent minimum medical benefit ratio. In 2013, for the previous year's plans, Assurant Health paid out $30.8 million in MBR rebates nationwide--more than any other insurer.
Fast forward to 2014, and Assurant Health had a medical benefit ratio of 104.3 percent for its 967,000 individual and small-group customers in both exchange and nonexchange plans.
Assurant Health, using Aetna's national provider network, sold exchange plans in 16 states, including Arizona, Indiana, New Hampshire, Pennsylvania, Florida, Michigan and Texas, along with non-exchange plans in 41 states. In the two years of those plans, even with double digit premium hikes, Assurant Health has struggled to make the financing work. Last year's losses were driven about equally by high medical claims and less-than-expected recoveries from the ACA's risk mitigation programs, executives said.
Before the decision to put the health unit up for sale, Assurant executives predicted that the ACA market would eventually become profitable.
"I guess our basic premise is the first people to participate in healthcare were the least healthy," said Chris Pagano, chief financial officer, in the first quarter conference call. "And as the block grows it will become, in aggregate, healthier. And that's been the promise that we've operated under since the beginning."
For other insurers trying to make the ACA exchanges work, Assurant's loss may by the market's gain.
Aetna CEO Mark Bertolini, describing an all around profitable first quarter, told investors he and others at the company are "cautiously optimistic on the potential for the public exchanges to develop into an attractive growth opportunity, where we can continue to offer value to customers and generate a reasonable return for our shareholders."