Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

 

 

Assurant, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-31978   39-1126612

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company     ¨

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

The number of shares of the registrant’s Common Stock outstanding at October 28, 2011 was 92,108,357.

 

 

 


Table of Contents

ASSURANT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

Item
Number

       Page
Number
 
PART I   
FINANCIAL INFORMATION  

1.

 

Financial Statements of Assurant, Inc.:

  
  Consolidated Balance Sheets (unaudited) at September 30, 2011 and December 31, 2010      2   
 

Consolidated Statement of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010

     4   
 

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) from December 31, 2010 through September 30, 2011

     5   
 

Consolidated Statement of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010

     6   
 

Notes to Consolidated Financial Statements (unaudited) for the nine months ended September 30, 2011 and 2010

     7   

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     41   

3.

 

Quantitative and Qualitative Disclosures About Market Risk

     63   

4.

 

Controls and Procedures

     63   
PART II   
OTHER INFORMATION   

1.

 

Legal Proceedings

     64   

1A.

 

Risk Factors

     64   

2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

     65   

6.

 

Exhibits

     66   
 

Signatures

     67   

Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except number of shares and per share amounts.

 

1


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2011 and December 31, 2010

 

 

     September 30,
2011
     December 31,
2010
 
     (in thousands except number of
shares and per share amounts)
 

Assets

     

Investments:

     

Fixed maturity securities available for sale, at fair value (amortized cost—$9,988,891 in 2011 and $10,009,320 in 2010)

   $ 10,978,902       $ 10,612,552   

Equity securities available for sale, at fair value (cost—$401,225 in 2011 and $452,648 in 2010)

     403,098         466,954   

Commercial mortgage loans on real estate, at amortized cost

     1,307,569         1,320,964   

Policy loans

     54,565         56,142   

Short-term investments

     508,375         358,702   

Collateral held/pledged under securities agreements

     96,080         136,589   

Other investments

     587,704         567,945   
  

 

 

    

 

 

 

Total investments

     13,936,293         13,519,848  
  

 

 

    

 

 

 

Cash and cash equivalents

     1,059,523         1,150,516   

Premiums and accounts receivable, net

     614,277         542,927   

Reinsurance recoverables

     5,295,502         4,997,316   

Accrued investment income

     159,470         147,069   

Tax receivable

     30,691         0   

Deferred acquisition costs

     2,563,885         2,493,422   

Property and equipment, at cost less accumulated depreciation

     247,497         267,169   

Deferred income taxes, net

     0         76,430   

Goodwill

     639,018         619,779   

Value of business acquired

     73,372         82,208   

Other intangible assets, net

     306,387         311,509   

Other assets

     186,039         188,454   

Assets held in separate accounts

     1,662,046         2,000,371   
  

 

 

    

 

 

 

Total assets

   $ 26,774,000       $ 26,397,018   
  

 

 

    

 

 

 

 

See the accompanying notes to the consolidated financial statements

2


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2011 and December 31, 2010

 

 

     September 30,
2011
    December 31,
2010
 
     (in thousands except number of
shares and per share amounts)
 

Liabilities

    

Future policy benefits and expenses

   $ 8,217,526      $ 8,105,153   

Unearned premiums

     5,315,673        5,063,999   

Claims and benefits payable

     3,485,270        3,351,169   

Commissions payable

     259,104        275,409   

Reinsurance balances payable

     87,879        104,333   

Funds held under reinsurance

     67,696        65,894   

Deferred gain on disposal of businesses

     139,141        154,493   

Obligation under securities agreements

     96,449        137,212   

Accounts payable and other liabilities

     1,442,821        1,339,582   

Deferred income taxes, net

     13,674        0   

Tax payable

     0        41,702   

Debt

     972,249        972,164   

Mandatorily redeemable preferred stock

     0        5,000   

Liabilities related to separate accounts

     1,662,046        2,000,371   
  

 

 

   

 

 

 

Total liabilities

     21,759,528        21,616,481   
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Stockholders’ equity

    

Common stock, par value $0.01 per share, 800,000,000 shares authorized, 92,926,138 and 102,000,371 shares outstanding at September 30, 2011 and December 31, 2010, respectively

     1,458        1,453   

Additional paid-in capital

     3,016,300        2,993,957   

Retained earnings

     3,596,751        3,264,025   

Accumulated other comprehensive income

     524,412        285,524   

Treasury stock, at cost; 52,959,178 and 43,344,638 shares at September 30, 2011 and December 31, 2010, respectively

     (2,124,449     (1,764,422
  

 

 

   

 

 

 

Total stockholders’ equity

     5,014,472        4,780,537  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 26,774,000      $ 26,397,018   
  

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

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Assurant, Inc.

Consolidated Statement of Operations (unaudited)

Three and Nine Months Ended September 30, 2011 and 2010

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands except number of shares and per share amounts)  

Revenues

        

Net earned premiums and other considerations

   $ 1,777,315      $ 1,832,514      $ 5,307,635      $ 5,589,052   

Net investment income

     172,176        176,170        517,893        525,380   

Net realized gains on investments, excluding other-than- temporary impairment losses

     5,079        7,280        27,937        33,705   

Total other-than-temporary impairment losses

     (4,703     (924     (7,848     (2,803

Portion of net loss (gain) recognized in other comprehensive income, before taxes

     156        (313     266        (1,234
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment losses recognized in earnings

     (4,547     (1,237     (7,582     (4,037

Amortization of deferred gain on disposal of businesses

     5,114        6,024        15,353        18,129   

Fees and other income

     106,578        93,220        300,037        259,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,061,715        2,113,971        6,161,273        6,422,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     998,875        913,253        2,881,582        2,746,565   

Amortization of deferred acquisition costs and value of business acquired

     370,107        376,850        1,086,720        1,144,151   

Underwriting, general and administrative expenses

     562,346        581,974        1,685,821        1,757,367   

Interest expense

     15,078        15,162        45,284        45,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     1,946,406        1,887,239        5,699,407        5,693,567   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     115,309        226,732        461,866        728,554   

Provision for income taxes

     39,326        85,062        78,282        264,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 75,983      $ 141,670      $ 383,584      $ 463,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share

        

Basic

   $ 0.80      $ 1.31      $ 3.91      $ 4.13   

Diluted

   $ 0.79      $ 1.30      $ 3.88      $ 4.11   

Dividends per share

   $ 0.18      $ 0.16      $ 0.52      $ 0.47   

Share Data

        

Weighted average shares outstanding used in basic per share calculations

     95,351,601        107,806,207        98,065,082        112,137,558   

Plus: Dilutive securities

     951,411        778,075        895,630        653,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in diluted per share calculations

     96,303,012        108,584,282        98,960,712        112,791,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

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Assurant, Inc.

Consolidated Statement of Stockholders’ Equity (unaudited)

From December 31, 2010 through September 30, 2011

 

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  
     (in thousands except number of shares and per share amounts)  

Balance, December 31, 2010

   $ 1,453       $ 2,993,957      $ 3,264,025      $ 285,524      $ (1,764,422   $ 4,780,537   

Stock plan exercises

     5         332        0        0        0        337   

Stock plan compensation expense

     0         24,974        0        0        0        24,974   

Change in tax benefit from share-based payment arrangements

     0         (2,963     0        0        0        (2,963

Dividends

     0         0        (50,858     0        0        (50,858

Acquisition of common stock

     0         0        0        0        (360,027     (360,027

Comprehensive income:

             

Net income

     0         0        383,584        0        0        383,584   

Other comprehensive income:

             

Net change in unrealized gains on securities, net of taxes of $(124,596)

     0         0        0        244,435        0        244,435   

Net change in other-than- temporary impairment gains recognized in other comprehensive income, net of taxes of $(1,981)

     0         0        0        3,679        0        3,679   

Net change in foreign currency translation, net of taxes of $3,651

     0         0        0        (17,278     0        (17,278

Amortization of pension and postretirement unrecognized net periodic benefit cost, net of taxes of $(4,347)

     0         0        0        8,052        0        8,052   
             

 

 

 

Total other comprehensive income

     0         0        0        0        0        238,888   
             

 

 

 

Total comprehensive income

     0         0        0        0        0        622,472   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 1,458       $ 3,016,300      $ 3,596,751      $ 524,412      $ (2,124,449   $ 5,014,472   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Consolidated Statement of Cash Flows (unaudited)

Nine Months Ended September 30, 2011 and 2010

 

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (in thousands)  

Net cash provided by operating activities

   $ 509,691      $ 465,461   
  

 

 

   

 

 

 

Investing activities

    

Sales of:

    

Fixed maturity securities available for sale

     1,183,324        1,437,872   

Equity securities available for sale

     71,798        66,985   

Property and equipment and other

     2,565        118   

Maturities, prepayments, and scheduled redemption of:

    

Fixed maturity securities available for sale

     749,210        567,337   

Purchases of:

    

Fixed maturity securities available for sale

     (1,908,896     (2,206,168

Equity securities available for sale

     (33,326     (19,346

Property and equipment and other

     (25,153     (42,100

Subsidiary, net of cash transferred

     (45,080     (7,162

Change in commercial mortgage loans on real estate

     12,591        56,934   

Change in short-term investments

     (155,564     1,655   

Change in other invested assets

     (24,900     (41,415

Change in policy loans

     1,489        (229

Change in collateral held under securities lending

     26,483        85,031   
  

 

 

   

 

 

 

Net cash used in investing activities

     (145,459     (100,488
  

 

 

   

 

 

 

Financing activities

    

Repayment of mandatorily redeemable preferred stock

     (5,000     0   

Change in tax benefit from share-based payment arrangements

     (2,963     (6,665

Acquisition of common stock

     (364,943     (369,159

Dividends paid

     (50,858     (52,702

Change in obligation under securities lending

     (26,482     (85,031

Change in receivables under securities loan agreements

     14,370        0   

Change in obligations to return borrowed securities

     (14,281     0   
  

 

 

   

 

 

 

Net cash used in financing activities

     (450,157     (513,557
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (5,068     (1,661
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (90,993     (150,245

Cash and cash equivalents at beginning of period

     1,150,516        1,318,552   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,059,523      $ 1,168,307   
  

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

1. Nature of Operations

Assurant, Inc. (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and select worldwide markets.

The Company is traded on the New York Stock Exchange under the symbol AIZ.

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

2. Basis of Presentation

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 GAAP for complete financial statements.

The interim financial data as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of the results for the interim periods. The unaudited interim 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. Certain prior period amounts have been reclassified to conform to the 2011 presentation.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together, “the Affordable Care Act”) was signed into law in March 2010. One provision of the Affordable Care Act, effective January 1, 2011, established a minimum medical loss ratio (“MLR”) designed to ensure that a minimum level of benefits are paid to health insurance policyholders. The Affordable Care Act established an MLR of 80% for individual and small group business and 85% for large group business. If the actual loss ratios, calculated in a manner prescribed by the Department of Health and Human Services (“HHS”), are less than the required MLR, rebates are payable to the policyholders by August 1 of the subsequent year. For additional information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in Item 2 contained elsewhere in this report.

Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The accompanying unaudited 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, 2010.

3. Recent Accounting Pronouncements

Recent Accounting Pronouncements—Adopted

On January 1, 2011, the Company adopted the guidance on multiple deliverable revenue arrangements. This guidance requires entities to use their best estimate of the selling price of a deliverable within a multiple deliverable revenue arrangement if the entity and other entities do not sell the deliverable separate from the other deliverables within the arrangement. In addition, it requires both qualitative and quantitative disclosures. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

Recent Accounting Pronouncements—Not Yet Adopted

In September 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to the intangibles – goodwill and other guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company chose to early adopt the revised standard as of October 1, 2011 and will apply the amended guidance to its fourth quarter annual test. The amended guidance results in a change in the procedures for assessing goodwill impairment and will not have an impact on the Company’s financial position and results of operations.

In July 2011, the FASB issued amendments to the other expenses guidance to address how health insurers should recognize and classify in their income statements fees mandated by the Affordable Care Act. The Affordable Care Act imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The amendments specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense ratably over the calendar year during which it is payable. The guidance is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. Therefore, the Company is required to adopt this guidance on January 1, 2014. The Company is currently evaluating the requirements of the amendments and the potential impact on the Company’s financial position and results of operations.

In June 2011, the FASB issued amendments to the comprehensive income guidance to provide two alternatives for presenting comprehensive income. An entity can report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, are displayed under either alternative. The statement(s) are to be presented with equal prominence as the other primary financial statements. The amendments eliminate the Company’s currently applied option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The guidance will not change the items that constitute net income or other comprehensive income, and will not change when an item of other comprehensive income must be reclassified to net income. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Therefore, the Company is required to adopt this guidance on January 1, 2012. Early adoption is permitted, but full retrospective application is required. The Company is currently evaluating which alternative to choose; however, the new presentation requirements will not have an impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued amendments to existing guidance on fair value measurement to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements in the fair value accounting guidance. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Therefore, the Company is required to adopt this guidance on January 1, 2012. The amendments are to be applied prospectively. The Company is currently evaluating the requirements of the amendments and the potential impact on the Company’s financial position and results of operations.

In October 2010, the FASB issued amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. The amendments modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. Under this amended guidance, acquisition costs are defined as costs that are directly related to the successful acquisition of new or renewal insurance contracts. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Therefore, the Company is required to adopt this guidance on January 1, 2012. Prospective application as of the date of adoption is required, however, retrospective application to all prior periods presented upon the date of adoption is permitted, but not required. We expect to adopt the guidance retrospectively. This will result in a reduction in our deferred acquisition cost asset. It will also cause an increase in our liability for future policy benefits and expenses for certain preneed policies whose reserves are calculated utilizing deferred acquisition costs. There will also be a decrease in the amortization associated with the previously deferred acquisition costs. We are evaluating the full effects of implementing the amended guidance, but we currently estimate that the cumulative effect adjustment that will result from our retrospective adoption will reduce the opening balance of retained earnings between $140,000 and $150,000 in the year of adoption,

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

net of the related tax benefit. This estimate is preliminary in nature and the actual amount of the reduction may be above or below the range. We currently estimate the adoption of these amendments will result in immaterial changes in net income in 2011 and in the years preceding 2011 to which the retrospective adoption will be applied. The amendments are generally more restrictive with regard to which costs can be deferred and may impact the pattern of reported income for certain products. We are still assessing the impact on future periods, but because of our overall mix of business we do not currently expect the amendments to cause material changes to net income.

4. Business Combinations

On June 21, 2011, in an all cash transaction, the Company acquired the SureDeposit business, the leading provider of security deposit alternatives to the multifamily housing industry, for $45,080. In connection with the acquisition, the Company recorded $25,350 of intangible assets, all of which are amortizable, and $19,608 of goodwill. The primary factor contributing to the recognition of goodwill is the future expected growth of this business. This acquisition expands the multifamily housing product offering and associated cross-selling opportunities with existing clients for the Assurant Specialty Property segment.

5. Investments

The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) of our fixed maturity and equity securities as of the dates indicated:

 

     September 30, 2011  
     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      OTTI in
AOCI (1)
 

Fixed maturity securities:

             

United States Government and government agencies and authorities

   $ 130,760       $ 9,466       $ (291   $ 139,935       $ 0   

States, municipalities and political subdivisions

     822,875         87,747         (327     910,295         0   

Foreign governments

     630,990         62,349         (1,358     691,981         0   

Asset-backed

     32,585         2,264         (173     34,676         1,114   

Commercial mortgage-backed

     84,318         5,407         (167     89,558         0   

Residential mortgage-backed

     853,348         62,087         (1,644     913,791         8,512   

Corporate

     7,434,015         828,679         (64,028     8,198,666         15,367   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 9,988,891       $ 1,057,999       $ (67,988   $ 10,978,902       $ 24,993   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

             

Common stocks

   $ 12,808       $ 838       $ (330   $ 13,316       $ 0   

Non-redeemable preferred stocks

     388,417         29,905         (28,540     389,782         0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 401,225       $ 30,743       $ (28,870   $ 403,098       $ 0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

9


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     December 31, 2010  
     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      OTTI in
AOCI (1)
 

Fixed maturity securities:

             

United States Government and government agencies and authorities

   $ 244,659       $ 6,050       $ (1,198   $ 249,511       $ 0   

States, municipalities and political subdivisions

     829,923         39,568         (4,657     864,834         0   

Foreign governments

     617,164         32,789         (1,418     648,535         0   

Asset-backed

     39,310         2,524         (84     41,750         1,016   

Commercial mortgage-backed

     102,312         4,670         (11     106,971         0   

Residential mortgage-backed

     764,884         36,842         (4,998     796,728         4,741   

Corporate

     7,411,068         541,720         (48,565     7,904,223         13,576   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 10,009,320       $ 664,163       $ (60,931   $ 10,612,552       $ 19,333   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

             

Common stocks

   $ 5,545       $ 1,029       $ (8   $ 6,566       $ 0   

Non-redeemable preferred stocks

     447,103         32,238         (18,953     460,388         0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 452,648       $ 33,267       $ (18,961   $ 466,954       $ 0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Represents the amount of OTTI gains in accumulated other comprehensive income (“AOCI”), which, from April 1, 2009, were not included in earnings under the OTTI guidance for debt securities.

Our states, municipalities and political subdivisions holdings are highly diversified across the United States and Puerto Rico, with no individual state’s exposure (including both general obligation and revenue securities) exceeding 0.5% of the overall investment portfolio as of September 30, 2011 and December 31, 2010. At September 30, 2011 and December 31, 2010, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $162,292 and $154,742, respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As of September 30, 2011 and December 31, 2010, revenue bonds account for 51% and 48% of the holdings, respectively. Excluding pre-refunded bonds, sales tax, highway, water, transit and miscellaneous (which includes bond banks, finance authorities and appropriations) provide for 79% and 80% of the revenue sources, as of September 30, 2011 and December 31, 2010, respectively.

The Company’s investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, which allow the assets and liabilities to be more appropriately matched. At September 30, 2011, approximately 60%, 14%, and 8% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. At December 31, 2010, approximately 60%, 11%, 7%, and 6% of the foreign government securities were held in the Canadian government/provincials, and the governments of Brazil, Germany and the United Kingdom, respectively. No other country represented more than 5% of our foreign government securities as of September 30, 2011 and December 31, 2010.

The cost or amortized cost and fair value of fixed maturity securities at September 30, 2011 by contractual maturity are shown below. Expected 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.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     Cost or Amortized
Cost
     Fair Value  

Due in one year or less

   $ 467,219       $ 474,761   

Due after one year through five years

     1,965,019         2,074,567   

Due after five years through ten years

     2,341,384         2,516,196   

Due after ten years

     4,245,018         4,875,353   
  

 

 

    

 

 

 

Total

     9,018,640         9,940,877   

Asset-backed

     32,585         34,676   

Commercial mortgage-backed

     84,318         89,558   

Residential mortgage-backed

     853,348         913,791   
  

 

 

    

 

 

 

Total

   $ 9,988,891       $ 10,978,902   
  

 

 

    

 

 

 

The following table summarizes the proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses that have been included in earnings as a result of those sales.

 

     For the Three  Months
Ended
September 30,
     For the Nine Months
Ended
September 30,
 
     2011      2010      2011      2010  

Proceeds from sales

   $ 332,490       $ 520,567       $ 1,280,982       $ 1,505,701   

Gross realized gains

     14,018         18,846         42,453         50,258   

Gross realized losses

     5,705         1,689         15,012         6,095   

The following table sets forth the net realized gains (losses), including OTTI, recognized in the statement of operations as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Net realized gains (losses) related to sales and other:

        

Fixed maturity securities

   $ 13,036      $ 14,950      $ 33,941      $ 40,579   

Equity securities

     (4,719     2,239        (4,808     4,980   

Commercial mortgage loans on real estate

     0        (9,000     0        (15,772

Other investments

     (3,238     (909     (1,196     3,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gains related to sales and other

     5,079        7,280        27,937        33,705   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized losses related to other-than-temporary impairments:

        

Fixed maturity securities

     (4,547     (1,055     (7,561     (3,544

Equity securities

     0        (182     (21     (493
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized losses related to other-than-temporary impairments

     (4,547     (1,237     (7,582     (4,037
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gains

   $ 532      $ 6,043      $ 20,355      $ 29,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other-Than-Temporary Impairments

The Company adopted the OTTI guidance, which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit, factors (e.g. interest rates and market conditions) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.

For the three and nine months ended September 30, 2011, the Company recorded $4,703 and $7,848, respectively, of OTTI, of which $4,547 and $7,582, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $156 and $266, respectively, related to all other factors and recorded as an unrealized loss component of AOCI. For the three and nine months ended September 30, 2010, the Company recorded $924 and $2,803, respectively, of OTTI, of which $1,237 and $4,037, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $(313) and $(1,234), respectively, related to all other factors and recorded as an unrealized gain component of AOCI.

The following tables set forth the amount of credit loss impairments recognized within the results of operations on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts.

 

     2011     2010  

Balance, June 30,

   $ 105,634      $ 105,762   

Additions for credit loss impairments recognized in the current period on securities not previously impaired

     0        9   

Additions for credit loss impairments recognized in the current period on securities previously impaired

     9        694   

Reductions for securities which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security

     0        (116

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security

     (202     (3

Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (1,895     (2,227
  

 

 

   

 

 

 

Balance, September 30,

   $ 103,546      $ 104,119   
  

 

 

   

 

 

 
     2011     2010  

Balance, January 1,

   $ 105,245      $ 108,053   

Additions for credit loss impairments recognized in the current period on securities not previously impaired

     1,455        494   

Additions for credit loss impairments recognized in the current period on securities previously impaired

     1,567        2,698   

Reductions for securities which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security

     0        (116

Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security

     (470     (287

Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (4,251     (6,723
  

 

 

   

 

 

 

Balance, September 30,

   $ 103,546      $ 104,119   
  

 

 

   

 

 

 

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities and the intent to sell or whether it is more likely than not that the Company will be required to sell the fixed maturity securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value.

The Company considers different factors to determine the amount of projected future cash flows and discounting methods for corporate debt and residential and commercial mortgage-backed or asset-backed securities. For corporate debt securities, the split between the credit and non-credit losses is driven principally by assumptions regarding the amount and timing of projected future cash flows. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the security at the date of acquisition. For residential and commercial mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security prior to impairment at the balance sheet date. The discounted cash flows become the new amortized cost basis of the fixed maturity security.

In periods subsequent to the recognition of an OTTI, the Company generally accretes the discount (or amortizes the reduced premium) into net investment income, up to the non-discounted amount of projected future cash flows, resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the estimated period of cash flows.

Realized gains and losses on sales of investments are recognized on the specific identification basis.

The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2011 and December 31, 2010 were as follows:

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     September 30, 2011  
     Less than 12 months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 7,033       $ (291   $ 0       $ 0      $ 7,033       $ (291

States, municipalities and political subdivisions

     0         0        5,474         (327     5,474         (327

Foreign governments

     9,982         (2     9,728         (1,356     19,710         (1,358

Asset-backed

     2,771         (173     0         0        2,771         (173

Commercial mortgage-backed

     18,663         (167     0         0        18,663         (167

Residential mortgage-backed

     49,182         (1,602     1,367         (42     50,549         (1,644

Corporate

     1,018,259         (42,997     159,390         (21,031     1,177,649         (64,028
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 1,105,890       $ (45,232   $ 175,959       $ (22,756   $ 1,281,849       $ (67,988
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

               

Common stocks

   $ 5,416       $ (330   $ 0       $ 0      $ 5,416       $ (330

Non-redeemable preferred stocks

     60,931         (6,304     95,386         (22,236     156,317         (28,540
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 66,347       $ (6,634   $ 95,386       $ (22,236   $ 161,733       $ (28,870
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2010  
     Less than 12 months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 105,597       $ (1,198   $ 0       $ 0      $ 105,597       $ (1,198

States, municipalities and political subdivisions

     136,578         (3,520     10,743         (1,137     147,321         (4,657

Foreign governments

     97,725         (538     9,902         (880     107,627         (1,418

Asset-backed

     2,865         (84     0         0        2,865         (84

Commercial mortgage-backed

     4,754         (11     0         0        4,754         (11

Residential mortgage-backed

     168,942         (4,907     1,982         (91     170,924         (4,998

Corporate

     753,340         (21,674     310,107         (26,891     1,063,447         (48,565
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 1,269,801       $ (31,932   $ 332,734       $ (28,999   $ 1,602,535       $ (60,931
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

               

Common stocks

   $ 479       $ (8   $ 0       $ 0      $ 479       $ (8

Non-redeemable preferred stocks

     46,336         (2,791     146,361         (16,162     192,697         (18,953
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 46,815       $ (2,799   $ 146,361       $ (16,162   $ 193,176       $ (18,961
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

14


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

Total gross unrealized losses represent less than 7% and 5% of the aggregate fair value of the related securities at September 30, 2011 and December 31, 2010, respectively. Approximately 54% and 43% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2011 and December 31, 2010, respectively. The total gross unrealized losses are comprised of 474 and 457 individual securities at September 30, 2011 and December 31, 2010, respectively. In accordance with its policy described above, the Company concluded that for these securities an adjustment to its results of operations for other-than-temporary impairments of the gross unrealized losses was not warranted at September 30, 2011 and December 31, 2010. These conclusions are based on a detailed analysis of the underlying credit and expected cash flows of each security. As of September 30, 2011, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in non-redeemable preferred stocks and in the financial industry of the Company’s corporate fixed maturity securities. For these concentrations, gross unrealized losses of twelve months or more were $40,016, or 89%, of the total. The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, we apply an impairment model similar to that used for our fixed maturity securities. As of September 30, 2011, the Company did not intend to sell these securities and it was not more likely than not that the Company would be required to sell them and no underlying cash flow issues were noted. Therefore, we did not recognize an OTTI on those perpetual preferred securities that had been in a continuous unrealized loss position for twelve months or more. As of September 30, 2011, the Company did not intend to sell the corporate fixed maturity securities and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of their amortized cost basis. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium.

The Company has made commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. At September 30, 2011, approximately 40% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Washington. 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 $10 to $16,369 at September 30, 2011 and from $5 to $16,614 at December 31, 2010.

Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. 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 of one. The loan-to-value and debt-service coverage ratios are generally updated annually in the third quarter. The following summarizes our loan-to value and average debt-service coverage ratios as of the dates indicated:

 

     September 30, 2011  

Loan-to-Value

   Carrying
Value
    % of Gross
Mortgage
Loans
    Debt-Service
Coverage ratio
 

70% and less

   $ 1,011,595        76.8 %     2.10   

71 – 80%

     186,085        14.1 %     1.38   

81 – 95%

     76,714        5.8 %     1.16   

Greater than 95%

     43,921        3.3 %     0.80   
  

 

 

   

 

 

   

Gross commercial mortgage loans

     1,318,315        100.0 %     1.90   
    

 

 

   

Less valuation allowance

     (10,746    
  

 

 

     

Net commercial mortgage loans

   $ 1,307,569       
  

 

 

     

 

15


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     December 31, 2010  

Loan-to-Value

   Carrying
Value
    % of Gross
Mortgage
Loans
    Debt-Service
Coverage ratio
 

70% and less

   $ 902,271        66.6 %     2.03   

71 – 80%

     217,282        16.1 %     1.41   

81 – 95%

     147,493        10.9 %     1.25   

Greater than 95%

     86,756        6.4 %     0.94   
  

 

 

   

 

 

   

Gross commercial mortgage loans

     1,353,802        100.0 %     1.78   
    

 

 

   

Less valuation allowance

     (32,838    
  

 

 

     

Net commercial mortgage loans

   $ 1,320,964       
  

 

 

     

All commercial mortgage loans that are individually impaired have an established mortgage loan valuation allowance for losses. Changing economic conditions affect our valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) a commercial mortgage loan valuation allowance for losses. In addition, we continue to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have exposure to earthquakes, have deteriorating credits or have experienced a reduction in debt-service coverage ratio. Where warranted, we have established or increased a valuation allowance based upon this analysis.

The commercial mortgage loan valuation allowance for losses was $10,746 and $32,838 at September 30, 2011 and December 31, 2010, respectively. In 2010, an overall expense of $16,709 was recorded primarily to increase the valuation allowance on one individually impaired commercial mortgage loan with a loan valuation allowance of $22,092 and a net loan value of $0 at December 31, 2010. In 2011, the loan valuation allowance was decreased by $22,092 due to the direct write down of the same individually impaired mortgage loan. This resulted in no impact to realized capital gains and losses on commercial mortgage loans.

Collateralized Transactions

The Company engages in transactions in which fixed maturity securities, especially bonds issued by the U.S. government, government agencies and authorities, and U.S. corporations, are loaned to selected broker/dealers. Collateral, greater than or equal to 102% of the fair value of the securities lent, plus accrued interest, is received in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality that are designated as available-for-sale. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained, as necessary. The Company is subject to the risk of loss to the extent there is a loss on the re-investment of cash collateral.

As of September 30, 2011 and December 31, 2010, our collateral held under securities lending, of which its use is unrestricted, was $96,080 and $122,219, respectively, and is included in the consolidated balance sheets under the collateral held/pledged under securities agreements caption. Our liability to the borrower for collateral received was $96,449 and $122,931, respectively, and is included in the consolidated balance sheets under the obligation under securities agreements caption. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of AOCI. All securities with unrealized losses have been in a continuous loss position for twelve months or longer as of September 30, 2011 and December 31, 2010. The Company has actively reduced the size of its securities lending to mitigate counter-party exposure. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments.

Cash proceeds that the Company receives as collateral for the securities it lends and subsequent repayment of the cash are regarded by the Company as cash flows from financing activities, since the cash received is considered a borrowing. Since the Company reinvests the cash collateral generally in investments that are designated as available-for-sale, the reinvestment is presented as cash flows from investing activities.

The Company has engaged in transactions in which securities issued by the U.S. government and government agencies and authorities are purchased under agreements to resell (“reverse repurchase agreements”). However, as of September 30, 2011, the Company has no open transactions. The Company may take possession of the securities purchased under reverse repurchase agreements. Collateral, greater than or equal to 100% of the fair value of the securities purchased, plus accrued interest, is pledged to

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

selected broker/dealers in the form of cash and cash equivalents or other securities, as provided for in the underlying agreement. The use of the cash collateral pledged is unrestricted. Interest earned on the collateral pledged is recorded as investment income. As of December 31, 2010, we had $14,370 of cash pledged under securities loan agreements, which is included in the consolidated balance sheets under the obligation under the collateral held/pledged under securities agreements caption.

The Company entered into these reverse repurchase agreements in order to initiate short positions in its investment portfolio. The borrowed securities are sold to a third party in the marketplace. The Company records obligations to return the securities that we no longer hold. The financial liabilities resulting from these borrowings are carried at fair value with the changes in value reported as realized gains or losses. As of December 31, 2010, we had $14,281 of obligations to return borrowed securities, which is included in the consolidated balance sheets under the obligation under securities agreements caption.

Cash payments for the collateral pledged, subsequent cash adjustments to receivables under securities loan agreements and obligations to return borrowed securities, and the return of the cash collateral from the secured parties is regarded by the Company as cash flows from financing activities, since the cash payments and receipts relate to borrowing of securities under a financing arrangement.

6. 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. In accordance with this guidance, the Company has categorized its recurring 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 considers 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 has the ability to access.

 

   

Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset.

 

   

Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

A review of fair value hierarchy classifications is conducted 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 September 30, 2011 and December 31, 2010. The amounts presented below for Collateral held/pledged under securities agreements, Other investments, Cash equivalents, Other assets, Assets and Liabilities held in separate accounts, Obligation under securities agreements 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 Assurant Investment Plan, American Security Insurance Company Investment Plan, Assurant

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

Deferred Compensation Plan, a modified coinsurance arrangement and other derivatives. The fair value amount and the majority of the associated levels presented for Other investments and Assets held in separate accounts are received directly from third parties.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     September 30, 2011  

Financial Assets

   Total      Level 1     Level 2     Level 3  

Fixed maturity securities:

         

United States Government and government agencies and authorities

   $ 139,935       $ 0      $ 135,525      $ 4,410   

State, municipalities and political subdivisions

     910,295         0        910,295        0   

Foreign governments

     691,981         1,999        667,758        22,224   

Asset-backed

     34,676         0        34,198        478   

Commercial mortgage-backed

     89,558         0        88,610        948   

Residential mortgage-backed

     913,791         0        913,791        0   

Corporate

     8,198,666         0        8,054,680        143,986   

Equity securities:

         

Common stocks

     13,316         12,633        683        0   

Non-redeemable preferred stocks

     389,782         0        389,760        22   

Short-term investments

     508,375         409,623   b      98,752   c      0   

Collateral held/pledged under securities agreements

     71,080         54,731   b      16,349   c      0   

Other investments

     267,005         47,059   a      199,574   c      20,372   d 

Cash equivalents

     800,365         791,242   b      9,123   c      0   

Other assets

     8,739         0        832        7,907   e 

Assets held in separate accounts

     1,601,355         1,390,165   a      211,190   c      0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial assets

   $ 14,638,919       $ 2,707,452      $ 11,731,120      $ 200,347   
  

 

 

    

 

 

   

 

 

   

 

 

 

Financial Liabilities

                         

Other liabilities

   $ 49,974       $ 47,058   a    $ 52   f    $ 2,864   f 

Liabilities related to separate accounts

     1,601,355         1,390,165   a      211,190   c      0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial liabilities

   $ 1,651,329       $ 1,437,223      $ 211,242      $ 2,864   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     December 31, 2010  

Financial Assets

   Total      Level 1     Level 2     Level 3  

Fixed maturity securities:

         

United States Government and government agencies and authorities

   $ 249,511       $ 0      $ 235,005      $ 14,506   

State, municipalities and political subdivisions

     864,834         0        864,834        0   

Foreign governments

     648,535         2,999        619,915        25,621   

Asset-backed

     41,750         0        41,750        0   

Commercial mortgage-backed

     106,971         0        102,429        4,542   

Residential mortgage-backed

     796,728         0        796,728        0   

Corporate

     7,904,223         0        7,778,538        125,685   

Equity securities:

         

Common stocks

     6,566         5,543        1,023        0   

Non-redeemable preferred stocks

     460,388         0        459,830        558   

Short-term investments

     358,702         248,859   b      109,843   c      0   

Collateral held/pledged under securities agreements

     72,219         54,134   b      18,085   c      0   

Other investments

     261,428         56,507   a      196,612   c      8,309   d 

Cash equivalents

     864,649         840,210   b      24,439   c      0   

Other assets

     11,280         0        1,455        9,825   e 

Assets held in separate accounts

     1,934,658         1,707,170   a      227,488   c      0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial assets

   $ 14,582,442       $ 2,915,422      $ 11,477,974      $ 189,046   
  

 

 

    

 

 

   

 

 

   

 

 

 

Financial Liabilities

                         

Obligation under securities agreements

   $ 14,281       $ 0      $ 14,281      $ 0   

Other liabilities

     51,632         51,323        309        0   

Liabilities related to separate accounts

     1,934,658         1,707,170   a      227,488   c      0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial liabilities

   $ 2,000,571       $ 1,758,493      $ 242,078      $ 0   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

a. 

Mainly includes mutual funds.

b. 

Mainly includes money market funds.

c. 

Mainly includes fixed maturity securities.

d. 

Mainly includes fixed maturity securities and other derivatives

e. 

Mainly includes the Consumer Price Index Cap Derivatives (“CPI Caps”).

f. 

Mainly includes other derivatives.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

There were no significant transfers between Level 1 and Level 2 financial assets during the period. However, there were transfers between Level 2 and Level 3 financial assets during the period, which are reflected in the “Net transfers” line below. Transfers between Level 2 and Level 3 most commonly occur when market observable inputs that were previously available become unavailable in the current period. The remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources.

The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets and liabilities carried at fair value during the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended September 30, 2011  
     Total
level 3
assets and
liabilities
    Fixed Maturity Securities     Equity
Securities
                   
       United States
Government
and
government
agencies and
authorities
    Foreign
governments
    Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-
redeemable
preferred
stocks
    Other
Investments
    Other
Assets
    Other
Liabilities
 

Balance, beginning of
period

   $ 180,079      $ 12,223      $ 21,947      $ 0      $ 995      $ 127,557      $ 35      $ 8,699      $ 8,623      $ 0   

Total gains (losses)
(realized/unrealized)
included in earnings

     4,409        (1     (1     0        0        (2,471     0        7,787        (716     (189

Net unrealized gains
(losses) included in
stockholders’ equity

     260        (10     278        (28     (10     111        (13     (68     0        0   

Purchases

     19,296        3,980        0        0        0        13,801        0        4,190        0        (2,675

Sales

     (5,296     (100     0        0        (37     (4,923     0        (236     0        0   

Net transfers (1)

     (1,265     (11,682     0        506        0        9,911        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 197,483      $ 4,410      $ 22,224      $ 478      $ 948      $ 143,986      $ 22      $ 20,372      $ 7,907      $ (2,864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2010  
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
             
       United
States
Government
and
government
agencies and
authorities
    Foreign
governments
     Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-
redeemable
preferred
stocks
    Other
Investments
    Other
Assets
 

Balance, beginning
of period

   $ 180,234      $ 17,215      $ 3,131       $ 9      $ 9,997      $ 119,149      $ 18,807      $ 4,207      $ 7,719   

Total gains (losses)
(realized/unrealized)
included in earnings

     1,901        (159     0         (9     4        (21     2,639        0        (553

Net unrealized gains
(losses) included in
stockholders’ equity

     2,505        (85     222         0        13        4,796        (2,417     (24     0   

Purchases

     12,881        12,812        0         0        0        0        0        69        0   

Sales

     (12,640     (1,133     0         0        (318     (4,996     (5,722     (335     (136

Net transfers (1)

     (8,345     0        0         0        (4,887     9,292        (12,750     0        0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 176,536      $ 28,650      $ 3,353       $ 0      $ 4,809      $ 128,220      $ 557      $ 3,917      $ 7,030   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     Nine Months Ended September 30, 2011  
     Total
level 3
assets and
liabilities
    Fixed Maturity Securities     Equity
Securities
                   
     United
States
Government
and
government
agencies and
authorities
    Foreign
governments
    Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-
redeemable
preferred
stocks
    Other
Investments
    Other
Assets
    Other
Liabilities
 

Balance, beginning
of period

   $ 189,046      $ 14,506      $ 25,621      $ 0-      $ 4,542      $ 125,685      $ 558      $ 8,309      $ 9,825      $ 0   

Total gains (losses)
(realized/unrealized)
included in earnings

     3,260        (248     (3     0        0        (2,870     (28     8,516        (1,918     (189

Net unrealized gains
(losses) included in
stockholders’ equity

     5,511        (47     726        (28     17        4,577        67        199        0        0   

Purchases

     32,922        3,980        0        0        0        27,427        0        4,190        0        (2,675

Sales

     (29,414     (2,099     0        0        (109     (25,790     (574     (842     0        0   

Net transfers (1)

     (3,842     (11,682     (4,120     506        (3,502     14,957        (1     0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 197,483      $ 4,410      $ 22,224      $ 478      $ 948      $ 143,986      $ 22      $ 20,372      $ 7,907      $ (2,864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2010  
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
             
     United
States
Government
and
government
agencies and
authorities
    Foreign
governments
     Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-
redeemable
preferred
stocks
    Other
Investments
    Other
Assets
 

Balance, beginning
of period

   $ 196,131      $ 0      $ 3,088       $ 9      $ 32,288      $ 136,726      $ 5,735      $ 4,275      $ 14,010   

Total (losses) gains
(realized/unrealized)
included in earnings

     (3,859     (487     1         (8     52        (233     2,639        4        (5,827

Net unrealized gains
(losses) included in
stockholders’ equity

     9,267        (19     264         5        527        11,604        (3,350     236        0   

Purchases

     44,317        32,333        0         588        0        2,658        8,116        622        0   

Sales

     (59,917     (3,867     0         0        (22,147     (25,808     (5,722     (1,220     (1,153

Net transfers (1)

     (9,403     690        0         (594     (5,911     3,273        (6,861     0        0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 176,536      $ 28,650      $ 3,353       $ 0      $ 4,809      $ 128,220      $ 557      $ 3,917      $ 7,030   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net transfers are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

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

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

active markets are used as of the period-end date (such as for mutual funds and money market funds). Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but rather by 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, one or more valuation techniques may be used. For all the classes of financial assets and liabilities included in the above hierarchy, excluding the CPI Caps and certain privately placed corporate bonds, the market valuation technique is generally used. For certain privately placed corporate bonds and the CPI Caps, the income valuation technique is generally used. For the periods ended September 30, 2011 and December 31, 2010, the application of the valuation technique applied to the Company’s classes of financial assets and liabilities has been consistent.

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 our 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 following observable market inputs (“standard inputs”), listed in the approximate order of priority, are utilized 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. To price municipal bonds, the pricing service uses material event notices and new issue data inputs in addition to the standard inputs. To price residential and commercial mortgage-backed securities and asset-backed securities, the pricing service uses vendor trading platform data, monthly payment information and collateral performance inputs in addition to the standard inputs. To price fixed maturity securities denominated in Canadian dollars, the pricing service uses observable inputs, including but not limited to, benchmark yields, reported trades, issuer spreads, benchmark securities and reference data. The pricing service also evaluates each security based on relevant market information including: relevant credit information, perceived market movements and sector news. Valuation models can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security. When market observable inputs are unavailable to the pricing service, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources and are categorized as Level 3 securities. The Company could not corroborate the non-binding broker quotes with Level 2 inputs.

A non-pricing service source prices certain privately placed corporate bonds using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons. A non-pricing service source prices our CPI Caps using a model with inputs including, but not limited to, the time to expiration, the notional amount, the strike price, the forward rate, implied volatility and the discount rate.

Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:

 

   

There are few recent transactions,

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

   

Little information is released publicly,

 

   

The available prices vary significantly over time or among market participants,

 

   

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.

The Company generally obtains one price for each financial asset. The Company performs a monthly analysis 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 investment and accounting professionals. Examples of procedures performed include, but are not limited to, 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 our financial assets in the fair value hierarchy.

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

The Company also measures the fair value of certain assets on a non-recurring basis, generally on an annual basis, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include commercial mortgage loans, goodwill and finite-lived intangible assets.

The Company carried a loan valuation allowance of $22,092 as of December 31, 2010 on one individually impaired commercial mortgage loan with a principal balance of $22,092. Due to the continued decline in the regional commercial real estate market, the value of the loan was determined to be zero at December 31, 2010. In 2011, the loan was written down and the valuation allowance was released, resulting in no impact to realized capital gains and losses on commercial mortgage loans. The fair value measurement was classified as Level 3 (unobservable) inputs in the fair value hierarchy at December 31, 2010.

The Company reviews goodwill annually in the fourth quarter for impairment or more frequently if indicators of impairment exist. When required, the Company utilizes both the income and market valuation approaches to estimate the fair value of its reporting units in Step 1 of the goodwill impairment test. Under the income approach, the Company determines the fair value of the reporting unit considering distributable earnings which were estimated from operating plans. The resulting cash flows are then discounted using a market participant weighted average cost of capital estimated for the reporting unit. After discounting the future discrete earnings to their present value, the Company estimates the terminal value attributable to the years beyond the discrete operating plan period. The discounted terminal value is then added to the aggregate discounted distributable earnings from the discrete operating plan period to estimate the fair value of the reporting unit. Under the market approach, the Company derives the fair value of the reporting unit based on various financial multiples, including but not limited to: price to tangible book value of equity, price to estimated 2011 earnings and price to estimated 2012 earnings which are estimated based on publicly available data related to comparable guideline companies. In addition, financial multiples are also estimated from publicly available purchase price data for acquisitions of companies operating in the insurance industry. The estimated fair value of the reporting units is more heavily weighted towards the income approach because the earnings capacity of a business is generally considered the most important factor in the valuation of a business enterprise.

Fair Value of Financial Instruments Disclosures

The financial instruments guidance requires disclosure of fair value information about financial instruments, as defined therein, 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

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

instruments, including those related to insurance contracts and those accounted for under the equity method and joint ventures guidance (such as real estate joint ventures).

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 Value Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures section above for more 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

 

   

Collateral held/pledged under securities agreements

 

   

Other investments

 

   

Other assets

 

   

Assets held in separate accounts

 

   

Obligation under securities agreements

 

   

Other liabilities

 

   

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 and policy loans: the fair values of mortgage loans are estimated using discounted cash flow analyses, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying value of policy loans reported in the balance sheets approximates fair value.

Policy reserves under investment products: the fair values for the Company’s policy reserves under the investment products are determined using discounted cash flow analysis.

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.

Mandatorily redeemable preferred stock: the fair value of mandatorily redeemable preferred stock equals the carrying value for all series of mandatorily redeemable preferred stock.

Obligation under securities agreements: obligation under securities agreements is reported at the amount received from the selected broker/dealers.

The following table discloses the carrying value and fair value of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of September 30, 2011 and December 31, 2010.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     September 30, 2011      December 31, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Financial assets

           

Commercial mortgage loans on real estate

   $ 1,307,569       $ 1,428,100       $ 1,320,964       $ 1,400,553   

Policy loans

     54,565         54,565         56,142         56,142   

Financial liabilities

           

Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal)

   $ 793,624       $ 759,614       $ 815,769       $ 788,258   

Funds held under reinsurance

     67,696         67,696         65,894         65,894   

Debt

     972,249         1,032,420         972,164         992,340   

Mandatorily redeemable preferred stocks

     0         0         5,000         5,000   

Obligations under securities agreements

     96,449         96,449         122,931         122,931   

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 table above. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.

Reinsurance Recoverables Credit Disclosures

A key credit quality indicator for reinsurance is the A.M. Best financial strength ratings of the reinsurer. The A.M. Best ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for 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 periodic basis, at least annually. The A.M. Best ratings have not changed significantly since December 31, 2010.

An allowance for doubtful accounts for reinsurance recoverables is recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management’s experience and current economic conditions. Information about the allowance for doubtful accounts for reinsurance recoverable as of September 30, 2011 is as follows:

 

Balance as of beginning-of-year

   $ 15,635   

Provision

     (2,707

Other additions

     57   

Direct write-downs charged against the allowance

     (1,756
  

 

 

 

Balance as of the end-of-period

   $ 11,229   
  

 

 

 

7. Income Taxes

As of December 31, 2010, the Company had a cumulative valuation allowance of $90,738 against deferred tax assets. During the nine months ended September 30, 2011, the Company recognized a cumulative income tax benefit of $80,252 related to the release of a portion of the valuation allowance due to sufficient taxable income of the appropriate character during the period from new planning strategies. The $80,252 consists of $80,000 of capital losses and $252 of operating losses. It is management’s assessment that it is more likely than not that $10,485 of deferred tax assets 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 GAAP taxable income, the Company has considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences,

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies.

8. Debt

In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000 (the “Senior Notes”). The Company received net proceeds of $971,537 from this transaction, which represents the principal amount less the discount. The discount of $3,463 is being amortized over the life of the Senior Notes and is included as part of interest expense on the statement of operations. 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.

The interest expense incurred related to the Senior Notes was $15,047 for the three months ended September 30, 2011 and 2010, respectively, and $45,141 for the nine months ended September 30, 2011 and 2010, respectively. There was $7,523 of accrued interest at September 30, 2011 and 2010, respectively. The Company made interest payments of $30,094 on February 15, 2011 and 2010 and August 15, 2011 and 2010.

Credit Facility

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 commercial paper program or in an amount sufficient to maintain the ratings assigned to the notes issued from the commercial paper program. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities at their level. This program is currently backed up by a $350,000 senior revolving credit facility, of which $325,704 was available at September 30, 2011, due to outstanding letters of credit.

On September 21, 2011, the Company entered into a four-year unsecured $350,000 revolving credit agreement (“2011 Credit Facility”) with a syndicate of banks arranged by JP Morgan Chase Bank, N.A. and Bank of America, N.A. The 2011 Credit Facility replaces the Company’s prior three-year $350,000 revolving credit facility (“2009 Credit Facility”), which was entered into on December 18, 2009 and was scheduled to expire in December 2012. The 2009 Credit Facility terminated upon the effective date of the 2011 Credit Facility. The 2011 Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and/or letters of credit from a sole issuing bank in an aggregate amount of $350,000 and is available until September 2015, provided the Company is in compliance with all covenants. The 2011 Credit Facility has a sublimit for letters of credit issued thereunder of $50,000. The proceeds of these loans may be used for the Company’s commercial paper program or for general corporate purposes. The Company may increase the total amount available under the 2011 Credit Facility to $525,000 subject to certain conditions.

The Company did not use the commercial paper program during the nine months ended September 30, 2011 and 2010 and there were no amounts outstanding relating to the commercial paper program at September 30, 2011 and December 31, 2010. The Company made no borrowings using either the 2009 or the 2011 Credit Facility and no loans are outstanding at September 30, 2011. The Company had $24,296 of letters of credit outstanding under the 2011 Credit Facility as of September 30, 2011.

The 2011 Credit Facility contains restrictive covenants and requires that the Company maintain certain specified minimum ratios and thresholds. Among others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. At September 30, 2011, the Company was in compliance with all covenants, minimum ratios and thresholds.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

9. Accumulated Other Comprehensive Income

The components of AOCI, net of tax, at September 30, 2011 are as follows:

 

     Foreign currency
translation
adjustment
    Unrealized
gains on
securities
     OTTI      Pension
under-
funding
    Accumulated
other
comprehensive
income
 

Balance at December 31, 2010

   $ 32,098      $ 413,255       $ 12,567       $ (172,396   $ 285,524   

Activity in 2011

     (17,278     244,435         3,679         8,052        238,888   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2011

   $ 14,820      $ 657,690       $ 16,246       $ (164,344   $ 524,412   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The amounts in the unrealized gains on securities column are net of reclassification adjustments of $11,092, net of tax, for the nine months ended September 30, 2011, for net realized gains on sales of securities included in net income. The amounts in the OTTI column are net of reclassification adjustments of $(973), net of tax, for the nine months ended September 30, 2011, for net realized losses on sales of securities included in net income.

10. Stock Based Compensation

Long-Term Equity Incentive Plan

In May 2008, the shareholders of the Company approved the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”), which authorized the granting of up to 3,400,000 shares of the Company’s common stock to employees, officers and non-employee directors. In May 2010, the shareholders of the Company approved an amended and restated ALTEIP, increasing the number of shares of the Company’s common stock authorized for issuance to 5,300,000. Under the ALTEIP, the Company may grant awards based on shares of our common stock, including stock options, stock appreciation rights (“SARs”), restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All future share-based grants will be awarded under the ALTEIP.

The Compensation Committee of the Board of Directors (the “Compensation Committee”) awarded RSUs and PSUs in 2011 and 2010. 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 were based on salary grade and performance and will vest one-third each year over a three-year period. RSUs granted to non-employee directors also 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. 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.

For the PSU portion of an award, the number of shares a participant will receive upon vesting is contingent upon the Company meeting certain pre-established performance goals, identified below, at the end of a three-year performance period. Performance will be measured against these to determine the number of shares a participant will receive. The payout levels can vary between 0% and 150% (maximum) of the target (100%) ALTEIP award amount based on the Company’s level of performance against the pre-established performance goals.

PSU Performance Goals. For 2011 and 2010, the Compensation Committee established book value per share (“BVPS”) growth excluding AOCI, revenue growth and total stockholder return as the three performance measures for PSU awards. BVPS growth is defined as the year-over-year growth of the Company’s stockholders’ equity excluding AOCI divided by the number of fully diluted total shares outstanding at the end of the period. Revenue growth is defined as the year-over-year change in GAAP total revenues as disclosed in the Company’s annual statement of operations. Total stockholder return is defined as appreciation in Company stock plus dividend yield to stockholders. For the 2011-2013 and 2010-2012 performance cycles, payouts will be determined by measuring performance against the average performance of companies included in the A.M. Best Insurance Index, excluding those with revenues of less than $1,000,000 or that are not in the health or insurance Global Industry Classification Standard codes.

Under the ALTEIP, the Company’s Chief Executive Officer (“CEO”) is authorized by the Board of Directors to grant common stock, restricted stock and RSUs to employees other than the executive officers of the Company (as defined in Section 16 of the

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Restricted stock and RSUs granted under this program may have different vesting periods.

Restricted Stock Units

RSUs granted to employees and to non-employee directors were 23,181 and 21,425 for the three months ended September 30, 2011 and 2010, respectively, and 515,746 and 549,732 for the nine months ended September 30, 2011 and 2010, respectively. The compensation expense recorded related to RSUs was $5,219 and $3,699 for the three months ended September 30, 2011 and 2010, respectively, and $14,984 and $10,091 for the nine months ended September 30, 2011 and 2010, respectively. The related total income tax benefit was $1,822 and $1,294 for the three months ended September 30, 2011 and 2010, respectively, and $5,230 and $3,532 for the nine months ended September 30, 2011 and 2010, respectively. The weighted average grant date fair value for RSUs granted during the nine months ended September 30, 2011 and 2010 was $38.15 and $33.42, respectively.

As of September 30, 2011, there was $22,326 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of RSUs vested during the three months ended September 30, 2011 and 2010 was $1,842 and $323, respectively, and $16,333 and $8,343 for the nine months ended September 30, 2011 and 2010, respectively.

Performance Share Units

No PSUs were granted during the three months ended September 30, 2011 and 2010. PSUs granted to employees were 401,735 and 439,934 for the nine months ended September 30, 2011 and 2010, respectively. The compensation expense recorded related to PSUs was $3,982 and $3,206 for the three months ended September 30, 2011 and 2010, respectively, and $7,854 and $7,541 for the nine months ended September 2011 and 2010, respectively. Portions of the compensation expense recorded during 2010 and 2009 were reversed during the first quarters of 2011 and 2010, since the Company’s level of actual performance as measured against pre-established performance goals had declined. The related total income tax benefit was $1,390 and $1,122 for the three months ended September 30, 2011 and 2010, respectively and $2,740 and $2,639 for the nine months ended September 30, 2011 and 2010, respectively. The weighted average grant date fair value for PSUs granted during the nine months ended September 30, 2011 and 2010 was $37.83 and $33.12, respectively.

As of September 30, 2011, there was $15,426 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 0.89 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 issued during the nine months ended September 30, 2011 and 2010 were based on the historical stock prices of the Company’s stock and peer insurance group. The expected term for grants issued during the nine months ended September 30, 2011 and 2010 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.

Long-Term Incentive Plan

Prior to the approval of the ALTEIP, share based awards were granted under the 2004 Assurant Long-Term Incentive Plan (“ALTIP”), which authorized the granting of up to 10,000,000 new shares of the Company’s common stock to employees and officers under the ALTIP, Business Value Rights Program (“BVR”) and CEO Equity Grants Program. Under the ALTIP, the Company was authorized to grant restricted stock and SARs. Since May 2008, no new grants have been made under this plan.

Restricted stock granted under the ALTIP vests on a prorated basis over a three year period. SARs granted prior to 2007 under the ALTIP cliff vest as of December 31 of the second calendar year following the calendar year in which the right was granted, and have a five year contractual life. SARs granted in 2007 and through May 2008 cliff vest on the third anniversary from the date the award was granted, and have a five year contractual life. SARs granted under the BVR Program have a three-year cliff vesting period. Restricted stock granted under the CEO Equity Grants Program have variable vesting schedules.

Restricted Stock

There was no restricted stock granted during the three months or nine months ended September 30, 2011 and 2010. The compensation expense recorded related to restricted stock was $65 and $317 for the three months ended September 30, 2011 and 2010, respectively, and $336 and $1,426 for the nine months ended September 30, 2011 and 2010, respectively. The related total

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

income tax benefit recognized was $23 and $111 for the three months ended September 30, 2011 and 2010, respectively, and $118 and $499 for the nine months ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, there was $58 of unrecognized compensation cost related to outstanding restricted stock. That cost is expected to be recognized over a weighted-average period of 0.24 years. The total fair value of restricted stock vested was $110 and $240 during the three months ended September 30, 2011 and 2010, respectively, and $1,398 and $2,330 for the nine months ended September 30, 2011 and 2010, respectively.

Stock Appreciation Rights

There were no SARs granted during the three and nine months ended September 30, 2011 and 2010. Currently there are no plans to award SARs in the future. The compensation expense recorded related to SARs was $1,273 for the three months ended September 30, 2010, and $880 and $5,518 for the nine months ended September 30, 2011 and 2010, respectively. The related total income tax benefit was $445 for the three months ended September 30, 2010, and $308 and $1,931 for the nine months ended September 30, 2011 and 2010, respectively. As of March 31, 2011, all outstanding SARs are fully vested and expensed, so there is no expense for the three months ended September 30, 2011 and no unrecognized compensation cost related to these awards.

The total intrinsic value of SARs exercised during the three months ended September 30, 2010 was $416, and $1,174 and $1,216 for the nine months ended September 30, 2011 and 2010, respectively. There were no SARs exercised during the three months ended September 30, 2011.

The fair value of each SAR granted to employees and officers was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities for awards issued were based on the median historical stock price volatility of insurance guideline companies and implied volatilities from traded options on the Company’s stock. The expected term for grants issued was assumed to equal the average of the vesting period of the SARs and the full contractual term of the SARs. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield was based on the current annual dividend and share price as of the grant date.

Directors Compensation Plan

The Company’s Amended and Restated Directors Compensation Plan, as amended, permitted the issuance of up to 500,000 shares of the Company’s common stock to non-employee directors. Since May 2008, all grants awarded to directors have been awarded from the ALTEIP, discussed above. There were no common shares issued or expense recorded under the Director’s Compensation Plan for the three and nine months ended September 30, 2011 and 2010, respectively.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase shares at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period. The compensation expense recorded related to the ESPP was $321 and $397 for the three months ended September 30, 2011 and 2010, respectively, and $985 and $1,310 for the nine months ended September 30, 2011 and 2010, respectively.

In January 2011, the Company issued 111,414 shares to employees at a discounted price of $31.06 for the offering period of July 1, 2010 through December 31, 2010. In January 2010, the Company issued 181,718 shares to employees at a discounted price of $21.65 for the offering period of July 1, 2009 through December 31, 2009.

In July 2011, the Company issued 106,373 shares to employees at a discounted price of $32.64 for the offering period of January 1, 2011 through June 30, 2011. In July 2010, the Company issued 142,444 shares to employees at a discounted price of $27.14 for the offering period of January 1, 2010 through June 30, 2010.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

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. Expected volatilities are based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s 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 share price as of the grant date.

11. Stock Repurchase

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

Period in 2011

   Number of
Shares
Purchased
     Average Price
Paid Per  Share
     Total Number  of
Shares

Purchased as Part of
Publicly Announced
Programs
 

January

     1,695,000       $ 38.76         1,695,000   

February

     1,097,940         40.27         1,097,940   

March

     1,629,100         39.00         1,629,100   

April

     1,469,000         38.21         1,469,000   

May

     213,000         39.68         213,000   

June

     1,302,000         35.16         1,302,000   

July

     687,000         35.20         687,000   

August

     994,000         33.76         994,000   

September

     527,500         35.04         527,500   
  

 

 

    

 

 

    

 

 

 

Total

     9,614,540       $ 37.45         9,614,540   
  

 

 

    

 

 

    

 

 

 

On January 22, 2010, the Company’s Board of Directors authorized the Company to repurchase up to $600,000 of its outstanding common stock. On January 18, 2011, the Company’s Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock, making the total remaining under the authorization $805,587 as of that date.

During the nine months ended September 30, 2011, the Company repurchased 9,614,540 shares of the Company’s outstanding common stock at a cost of $359,835, exclusive of commissions, leaving $478,205 remaining at September 30, 2011 under the total repurchase authorization.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

12. Earnings Per Common Share

The following table presents net income, the weighted average common shares used in calculating basic earnings per common share (“EPS”) and those used in calculating diluted EPS for each period presented below.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Numerator

        

Net income

   $ 75,983      $ 141,670      $ 383,584      $ 463,568   

Deduct dividends paid

     (17,178     (17,238     (50,858     (52,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

   $ 58,805      $ 124,432      $ 332,726      $ 410,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted average shares outstanding used in basic earnings per share calculations

     95,351,601        107,806,207        98,065,082        112,137,558   

Incremental common shares from :

        

SARs

     167,924        223,192        193,330        197,191   

PSUs

     783,487        554,883        702,300        456,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in diluted earnings per share calculations

     96,303,012        108,584,282        98,960,712        112,791,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - Basic

        

Distributed earnings

   $ 0.18      $ 0.16      $ 0.52      $ 0.47   

Undistributed earnings

     0.62        1.15        3.39        3.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.80      $ 1.31      $ 3.91      $ 4.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - Diluted

        

Distributed earnings

   $ 0.18      $ 0.16      $ 0.52      $ 0.47   

Undistributed earnings

     0.61        1.14        3.36        3.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.79      $ 1.30      $ 3.88      $ 4.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average SARs totaling 1,825,748 and 2,960,688 for the three months ended September 30, 2011 and 2010, respectively, and 2,184,815 and 3,355,176 for the nine months ended September 30, 2011 and 2010, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method.

 

32


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

13. Retirement and Other Employee Benefits

The components of net periodic benefit cost for the Company’s qualified pension benefits plan, nonqualified pension benefits plan and retirement health benefits plan for the three and nine months ended September 30, 2011 and 2010 were as follows:

 

     Qualified Pension
Benefits
    Nonqualified Pension
Benefits (1)
     Retirement Health
Benefits
 
     For the Three Months Ended
September 30,
    For the Three Months Ended
September 30,
     For the Three Months Ended
September 30,
 
     2011     2010     2011      2010      2011     2010  

Service cost

   $ 6,677      $ 7,956      $ 763       $ 741       $ 567      $ 1,328   

Interest cost

     8,160        8,438        1,475         1,523         833        1,353   

Expected return on plan assets

     (10,074     (9,785     0         0         (754     (718

Amortization of prior service cost

     24        30        199         206         (238     367   

Amortization of net loss (gain)

     3,026        2,702        633         751         (145     0   

Curtailment credit / special termination benefits

     0        0        136         0         0        0   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 7,813      $ 9,341      $ 3,206       $ 3,221       $ 263      $ 2,330   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     Qualified Pension
Benefits
    Nonqualified Pension
Benefits (1)
     Retirement Health
Benefits
 
     For the Nine Months Ended
September 30,
    For the Nine Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2011     2010     2011      2010      2011     2010  

Service cost

   $ 22,177      $ 20,406      $ 2,213       $ 1,841       $ 2,667      $ 3,228   

Interest cost

     24,910        24,188        4,375         4,623         3,083        3,653   

Expected return on plan assets

     (30,624     (28,285     0         0         (2,204     (1,968

Amortization of prior service cost

     74        80        499         656         512        1,117   

Amortization of net loss (gain)

     9,426        7,502        2,033         1,701         (145     0   

Curtailment credit / special termination benefits

     0        0        386         0         0        0   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 25,963      $ 23,891      $ 9,506       $ 8,821       $ 3,913      $ 6,030   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) The Company’s nonqualified plan is unfunded.

Our qualified pension benefits plan (the “Plan”) was under-funded by $130,536 and $96,278 (based on the fair value of Plan assets compared to the projected benefit obligation) on a GAAP basis at September 30, 2011 and December 31, 2010, respectively. This equates to an 82% and 85% funded status at September 30, 2011 and December 31, 2010, respectively. The change in under-funded status is mainly due to a decrease in the discount rate used to determine the projected benefit obligation. During the first nine months of 2011, $40,000 in cash was contributed to the Plan. The Company is considering whether or not to make any additional contributions to the Plan over the remainder of 2011.

 

33


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

14. Segment Information

The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Assurant Solutions provides debt protection administration, credit-related insurance, warranties and service contracts, and pre-funded funeral insurance. Assurant Specialty Property provides lender-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual health and small employer group health insurance. Assurant Employee Benefits primarily provides group dental insurance, group disability insurance, and group life insurance. Corporate & Other includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & 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 segments based on segment income (loss) 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.

The following tables summarize selected financial information by segment:

 

34


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     Three Months Ended September 30, 2011  
     Solutions      Specialty
Property
     Health      Employee
Benefits
     Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 600,679       $ 476,712       $ 428,971       $ 270,953       $ 0      $ 1,777,315   

Net investment income

     98,453         25,980         11,703         32,316         3,724        172,176   

Net realized gains on investments

     0         0         0         0         532        532   

Amortization of deferred gain on disposal of businesses

     0         0         0         0         5,114        5,114   

Fees and other income

     70,126         21,329         8,989         6,157         (23     106,578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     769,258         524,021         449,663         309,426         9,347        2,061,715   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

                

Policyholder benefits

     214,861         265,072         328,235         190,707         0        998,875   

Amortization of deferred acquisition costs and value of business acquired

     270,505         90,287         0         9,315         0        370,107   

Underwriting, general and administrative expenses

     229,739         104,249         111,766         88,963         27,629        562,346   

Interest expense

     0         0         0         0         15,078        15,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total benefits, losses and expenses

     715,105         459,608         440,001         288,985         42,707        1,946,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income (loss) before provision (benefit) for income tax

     54,153         64,413         9,662         20,441         (33,360     115,309   

Provision (benefit) for income taxes

     18,830         20,759         3,899         6,826         (10,988     39,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income (loss) after tax

   $ 35,323       $ 43,654       $ 5,763       $ 13,615       $ (22,372  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net income

                 $ 75,983   
                

 

 

 

 

35


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     Three Months Ended September 30, 2010  
     Solutions      Specialty
Property
     Health      Employee
Benefits
     Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 611,264       $ 481,108       $ 467,726       $ 272,416       $ 0      $ 1,832,514   

Net investment income

     99,084         27,064         11,985         33,599         4,438        176,170   

Net realized gains on investments

     0         0         0         0         6,043        6,043   

Amortization of deferred gain on disposal of businesses

     0         0         0         0         6,024        6,024   

Fees and other income

     59,090         18,544         10,027         5,528         31        93,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     769,438         526,716         489,738         311,543         16,536        2,113,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

                

Policyholder benefits

     223,597         165,977         334,216         189,463         0        913,253   

Amortization of deferred acquisition costs and value of business acquired

     276,816         90,931         714         8,389         0        376,850   

Underwriting, general and administrative expenses

     219,216         107,061         144,980         87,773         22,944        581,974   

Interest expense

     0         0         0         0         15,162        15,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total benefits, losses and expenses

     719,629         363,969         479,910         285,625         38,106        1,887,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income (loss) before provision (benefit) for income tax

     49,809         162,747         9,828         25,918         (21,570     226,732   

Provision (benefit) for income taxes

     17,476         56,094         4,488         8,986         (1,982     85,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income (loss) after tax

   $ 32,333       $ 106,653       $ 5,340       $ 16,932       $ (19,588  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net income

                 $ 141,670   
                

 

 

 

 

36


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2011 and 2010

(In thousands, except number of shares and per share amounts)

 

 

     Nine Months Ended September 30, 2011  
     Solutions      Specialty
Property
     Health      Employee
Benefits
     Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 1,815,305       $ 1,409,465       $ 1,280,572       $ 802,293       $ 0      $ 5,307,635   

Net investment income

     295,508         78,370         34,410         97,355         12,250        517,893   

Net realized gains on investments

     0         0         0         0         20,355        20,355   

Amortization of deferred gain on disposal of businesses

     0         0         0         0         15,353        15,353   

Fees and other income

     196,976         56,878         26,828         19,095         260        300,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     2,307,789         1,544,713         1,341,810         918,743         48,218        6,161,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

                

Policyholder benefits

     645,419         686,600         962,229         587,334         0        2,881,582   

Amortization of deferred acquisition costs and value of business acquired

     791,473         267,893         0         27,354         0        1,086,720   

Underwriting, general and administrative expenses

     700,989         305,147         348,530         260,851         70,304        1,685,821   

Interest expense

     0         0         0         0         45,284        45,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total benefits, losses and expenses

     2,137,881         1,259,640         1,310,759         875,539         115,588        5,699,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income (loss) before provision (benefit) for income tax

     169,908         285,073         31,051         43,204         (67,370     461,866   

Provision (benefit) for income taxes

     56,875         96,156         12,904         14,571         (102,224     78,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment income after tax

   $ 113,033       $ 188,917       $ 18,147       $ 28,633       $ 34,854     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net income

                 $ 383,584   
                

 

 

 
     As of September 30, 2011  

Segment assets:

  

Segment assets, excluding goodwill

   $ 11,291,955       $ 3,397,772       $ 1,093,401       $ 2,495,356       $ 7,856,498      $ 26,134,982   
  

 

 

    

 

 

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