All’s Wells at Assurant

Assurant, which is still my favorite insurance company and stock, is down 10% as I write. The CEO, CFO, and EVP, Chief Actuary, and VP-Risk Management for Solutions/Specialty Property, have all received Wells notices, and are now on administrative leave.So what are the issues? Prior to its IPO, when it was a part of Fortis, Assurant entered into a treaty that provided a limited amount of reinsurance to Assurant’s property lines. From the 8/16/2005 NT 10-Q:

As disclosed in the Risk Factors section of Assurant, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2004, 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, which has accounting implications that may impact previously reported financial statements. While management believes that the difference resulting from any 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 $2.6 million, $1.5 million and $0.5 million, respectively, and losses ceded were $10 million, $0, and $0, respectively. This contract expired in December of 2004 and was not renewed.

From my reading, when the original reinsurance deal was done, the current CEO was CFO, and the current CFO was head of Solutions. So, all five were involved with the unit in question, so the Wells notices to the CEO and CFO do not necessarily mean that Assurant as a whole is implicated, just the Solutions unit, and not the Solutions unit’s current operations either. If earnings have to be restated, the net result should be near zero, and it would be only for 2002-2004.

It is possible that the finite reinsurance treaty in question may have smoothed earnings during the IPO and the first year, but from my angle, it seems to be going the wrong way. That said, in 2005, the audit committee found the side letter, which is the incriminating bit of data, which turned a reinsurance treaty into an accounting ploy that should have been treated as a loan.

There are only two risks here. Assurant loses five great employees, who get replaced from their exceptionally deep bench. No other insurer in the industry invests as much in their people as Assurant does. They have the people to fill the shoes, if need be. The second possibility is some sort of legal settlement, and in this day and age, who can tell how large that will be? For Ren Re on a more serious lapse on finite Re, the size of the fine was $15 million.

So, I have been buying Assurant today. Hasn’t been this cheap on earnings since 2004. You get a top quartile ROE insurer at a below market multiple.

Full disclosure: long AIZ