Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934

For the transition period from            to            

 

Commission file number 001-31978

 

Assurant, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   39-1126612

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

One Chase Manhattan Plaza, 41st Floor

New York, New York

  10005
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code:

(212) 859-7000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

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 x 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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. (Check one):

 

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

 

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

 

The aggregate market value of the Common Stock held by non-affiliates of the registrant was $3,428 million at June 30, 2011 based on the closing sale price of $36.27 per share for the common stock on such date as traded on the New York Stock Exchange.

 

The number of shares of the registrant’s Common Stock outstanding at February 15, 2012 was 87,501,215.

 

Documents Incorporated by Reference

Certain information contained in the definitive proxy statement for the annual meeting of stockholders to be held on May 10, 2012 (2012 Proxy Statement) is incorporated by reference into Part III hereof.

 

 


Table of Contents

ASSURANT, INC.

 

ANNUAL REPORT ON FORM 10-K

 

For the Fiscal Year Ended December 31, 2011

 

TABLE OF CONTENTS

 

Item

Number

        Page
Number
 
   PART I   

1.

   Business      1   

1A.

   Risk Factors      15   

1B.

   Unresolved Staff Comments      32   

2.

   Properties      32   

3.

   Legal Proceedings      32   

4.

   Mine Safety Disclosures      32   
   PART II   

5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      33   

6.

   Selected Financial Data      37   

7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

7A.

   Quantitative and Qualitative Disclosures About Market Risk      80   

8.

   Financial Statements and Supplementary Data      85   

9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      85   

9A.

   Controls and Procedures      85   

9B.

   Other Information      86   
   PART III   

10.

   Directors, Executive Officers and Corporate Governance      87   

11.

   Executive Compensation      87   

12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      87   

13.

   Certain Relationships and Related Transactions, and Director Independence      87   

14.

   Principal Accounting Fees and Services      87   
   PART IV   

15.

   Exhibits and Financial Statement Schedules      88   

Signatures

     93   

EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLP

  

EX-31.1: CERTIFICATION

  

EX-31.2: CERTIFICATION

  

EX-32.1: CERTIFICATION

  

EX-32.2: CERTIFICATION

  

 

Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except for number of shares, per share amounts, registered holders, number of employees, beneficial owners, number of securities in an unrealized loss position and number of loans.

 

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FORWARD-LOOKING STATEMENTS

 

Some of the statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they may use words such as “will,” “may,” “anticipates,” “expects,” “estimates,” “projects,” “intends,” “plans,” “believes,” “targets,” “forecasts,” “potential,” “approximately,” or the negative version of those words and other words and terms with a similar meaning. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results might differ materially from those projected in the forward-looking statements. The Company undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments.

 

In addition to the factors described under “Critical Factors Affecting Results,” the following risk factors could cause our actual results to differ materially from those currently estimated by management:

 

(i) the effects of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder, on our health and employee benefits businesses;

 

(ii) actions by governmental agencies that could result in reductions of the premium rates we charge or increases in the claims we pay;

 

(iii) loss of significant client relationships, distribution sources and contracts;

 

(iv) failure to attract and retain sales representatives;

 

(v) losses due to natural and man-made catastrophes;

 

(vi) a decline in our credit or financial strength ratings (including the risk of ratings downgrades in the insurance industry);

 

(vii) deterioration in the Company’s market capitalization compared to its book value that could result in further impairment of goodwill;

 

(viii) unfavorable outcomes in litigation and/or regulatory investigations that could negatively affect our business and reputation;

 

(ix) current or new laws and regulations that could increase our costs and decrease our revenues;

 

(x) general global economic, financial market and political conditions (including difficult conditions in financial, capital and credit markets, the global economic slowdown, fluctuations in interest rates or a prolonged period of low interest rates, monetary policies, unemployment and inflationary pressure);

 

(xi) inadequacy of reserves established for future claims;

 

(xii) failure to predict or manage benefits, claims and other costs;

 

(xiii) uncertain tax positions;

 

(xiv) fluctuations in exchange rates and other risks related to our international operations;

 

(xv) unavailability, inadequacy and unaffordable pricing of reinsurance coverage;

 

(xvi) diminished value of invested assets in our investment portfolio (due to, among other things, volatility in financial markets, the global economic slowdown, credit and liquidity risk, other than temporary impairments and increases in interest rates);

 

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(xvii) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance;

 

(xviii) inability of reinsurers to meet their obligations;

 

(xix) credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions;

 

(xx) failure to effectively maintain and modernize our information systems and protect them from cyber-security threats;

 

(xxi) failure to protect client information and privacy;

 

(xxii) failure to find and integrate suitable acquisitions and new ventures;

 

(xxiii) inability of our subsidiaries to pay sufficient dividends;

 

(xxiv) failure to provide for succession of senior management and key executives;

 

(xxv) significant competitive pressures in our businesses;

 

(xxvi) risks related to outsourcing activities; and

 

(xxvii) cyclicality of the insurance industry.

 

For a more detailed discussion of the risk factors that could affect our actual results, please refer to “Critical Factors Affecting Results” in Item 7 and “Risk Factors” in Item 1A of this Form 10-K.

 

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PART I

 

Item 1. Business

 

Assurant, Inc. (“Assurant” or the “Company”) is a Delaware corporation formed in connection with the initial public offering (“IPO”) of its common stock, which began trading on the New York Stock Exchange on February 5, 2004. Prior to the IPO, Fortis, Inc., a Nevada corporation, formed Assurant and merged into it on February 4, 2004.

 

Assurant is a provider of specialized insurance products and related services in North America and select worldwide markets. Our four operating segments—Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits—partner with clients who are leaders in their industries and build leadership positions in a number of specialty insurance market segments. Among the products offered by the operating segments are 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, disability, and life insurance and employee—funded voluntary benefits.

 

Assurant’s mission is to be the premier provider of specialized insurance products and related services in North America and select worldwide markets. To achieve this mission, we focus on the following areas:

 

Building and maintaining specialty insurance businesses—Our four operating segments are focused on serving specific sectors of the insurance market. We believe that the diversity of our businesses helps us to maintain financial stability because our businesses will generally not be affected in the same way by the same economic and operating trends.

 

Leveraging a set of core capabilities for competitive advantage—We pursue a strategy of building leading positions in specialized market segments for insurance products and related services by applying our core capabilities to create competitive advantages—managing risk; managing relationships with large distribution partners; and integrating complex administrative systems. These core capabilities represent areas of expertise that are advantages within each of our businesses. We seek to generate attractive returns by building on specialized market knowledge, well-established distribution relationships and, in some businesses, economies of scale.

 

Managing targeted growth initiatives—Our approach to mergers, acquisitions and other growth opportunities reflects our prudent and disciplined approach to managing our businesses. Our mergers, acquisitions and business development process targets new business that complements or supports our existing business model.

 

Identifying and adapting to evolving market needs—Assurant’s businesses strive to adapt to changing market conditions by tailoring product and service offerings to specific customer and client needs. By understanding consumer dynamics in our core markets, we seek to design innovative products and services that will enable us to sustain long-term profitable growth and market leading positions.

 

Competition

 

Assurant’s businesses focus on niche products and related services within broader insurance markets. Although we face competition in each of our businesses, we believe that no single competitor competes against us in all of our business lines. The business lines in which we operate are generally characterized by a limited number of competitors. Competition in each business is based on a number of factors, including quality of service, product features, price, scope of distribution, financial strength ratings and name recognition. The relative importance of these factors varies by product and market. We compete for customers and distributors with insurance companies and other financial services companies in our businesses.

 

Competitors of Assurant Solutions and Assurant Specialty Property include insurance companies and financial institutions. Assurant Health’s main competitors are other health insurance companies, Health Maintenance Organizations (“HMOs”) and the Blue Cross/Blue Shield plans in states where we write business. Assurant Employee Benefits’ competitors include other benefit and life insurance companies, dental managed care entities and not-for-profit dental plans.

 

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Segments

 

For additional information on our segments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations” and Note 22 to the Consolidated Financial Statements included elsewhere in this report.

 

Assurant Solutions

 

     For the Years Ended  
     December 31, 2011      December 31, 2010  

Gross written premiums for selected product groupings (1):

     

Domestic extended service contracts and warranties (2)

   $ 1,470,605       $ 1,193,423   

International extended service contracts and warranties (2)

     622,674         523,382   

Preneed life insurance (face sales)

     759,692         734,884   

Domestic credit insurance

     399,564         422,825   

International credit insurance

     1,013,486         968,878   

Net earned premiums and other considerations

   $ 2,438,407       $ 2,484,299   

Segment net income

   $ 141,553       $ 103,206   

Equity (3)

   $ 1,443,797       $ 1,448,684   

 

(1) Gross written premiums does not necessarily translate to an equal amount of subsequent net earned premium since Assurant Solutions reinsures a portion of their premiums to third parties and to insurance subsidiaries of its clients.
(2) Extended service contracts include warranty contracts for products such as cellular phones, personal computers, consumer electronics, appliances, automobiles and recreational vehicles.
(3) Equity excludes accumulated other comprehensive income.

 

Products and Services

 

Assurant Solutions targets growth in three key product areas: domestic and international extended service contracts (“ESC”) and warranties; preneed life insurance; and international credit insurance.

 

ESC and Warranties: Through partnerships with leading retailers and original equipment manufacturers, we underwrite and provide administrative services for ESC and warranties. These contracts provide consumers with coverage on cellular phones, personal computers, consumer electronics, appliances, automobiles and recreational vehicles, protecting them from certain covered losses. We pay the cost of repairing or replacing customers’ property in the event of mechanical breakdown, accidental damage, and casualty losses such as theft, fire, and water damage. Our strategy is to provide service to our clients that addresses all aspects of the extended service contract or warranty, including program design and marketing strategy. We provide administration, claims handling and customer service. We believe that we maintain a differentiated position in this marketplace as a provider of both the required administrative infrastructure and insurance underwriting capabilities.

 

Preneed Life Insurance: Preneed life insurance allows individuals to prepay for a funeral in a single payment or in multiple payments over a fixed number of years. The insurance policy proceeds are used to address funeral costs at death. These products are only sold in the U.S. and Canada and are generally structured as whole life insurance policies in the U.S. and annuity products in Canada.

 

Credit Insurance: Our credit insurance products offer protection from life events and uncertainties that arise in purchasing and borrowing transactions. Credit insurance programs generally offer consumers the option to protect a credit card balance or installment loan in the event of death, involuntary unemployment or disability, and are generally available to all consumers without the underwriting restrictions that apply to term life insurance.

 

Regulatory changes have reduced the demand for credit insurance in the U.S. Consequently, we have seen a reduction in credit insurance domestic gross written premiums, a trend we expect to continue.

 

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Marketing and Distribution

 

Assurant Solutions focuses on establishing strong, long-term relationships with leading distributors of its products and services. We partner with some of the largest consumer electronics and appliance retailers and original equipment manufacturers to market our ESC and warranty products. In our Preneed business, we have an exclusive relationship with Services Corporation International (“SCI”), the largest funeral provider in North America.

 

Several of our distribution agreements are exclusive. Typically these agreements have terms of one to five years and allow us to integrate our administrative systems with those of our clients.

 

In addition to the domestic market, we operate in Canada, the United Kingdom (“U.K.”), Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Mexico and China. In these markets, we primarily sell ESC and credit insurance products through agreements with financial institutions, retailers and wireless service providers. Although there has been contraction in the domestic credit insurance market, several international markets are experiencing growth in the credit insurance business. Expertise gained in the domestic credit insurance market has enabled us to extend our administrative infrastructure internationally. Systems, training, computer hardware and our overall market development approach are customized to fit the particular needs of each targeted international market.

 

Underwriting and Risk Management

 

We write a significant portion of our contracts on a retrospective commission basis. This allows us to adjust commissions based on claims experience. Under these commission arrangements, the compensation of our clients is based upon the actual losses incurred compared to premiums earned after a specified net allowance to us. We believe that these arrangements better align our clients’ interests with ours and help us to better manage risk exposure.

 

Profits from our preneed life insurance programs are generally earned from interest rate spreads—the difference between the death benefit growth rates on underlying policies and the investment returns generated on the assets we hold related to those policies. To manage these spreads, we regularly adjust pricing to reflect changes in new money yields.

 

Assurant Specialty Property

 

     For the Years Ended  
     December 31, 2011     December 31, 2010  

Net earned premiums and other considerations by major product grouping:

    

Homeowners (lender-placed and voluntary)

   $ 1,274,485      $ 1,342,791   

Manufactured housing (lender-placed and voluntary)

     216,613        220,309   

Other (1)

     413,540        390,123   
  

 

 

   

 

 

 

Total

   $ 1,904,638      $ 1,953,223   
  

 

 

   

 

 

 

Segment net income

   $ 305,065      $ 424,287   

Loss ratio (2)

     45.0 %     35.1 %

Expense ratio (3)

     38.7 %     39.5 %

Combined ratio (4)

     81.9 %     73.3 %

Equity (5)

   $ 1,114,308      $ 1,134,432   

 

(1) Other primarily includes lender-placed flood, miscellaneous specialty property and multi-family housing insurance products.
(2) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. (Fees and other income is not included in the above table.)
(4) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income. (Fees and other income is not included in the above table.)
(5) Equity excludes accumulated other comprehensive income.

 

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Products and Services

 

Assurant Specialty Property’s business strategy is to pursue long-term growth in lender-placed homeowners insurance, and adjacent markets with similar characteristics, such as lender-placed flood insurance, and renters insurance. Assurant Specialty Property also writes other specialty products.

 

In June 2011 we acquired SureDeposit, the market leader in rental security deposit alternatives. We believe that this acquisition will help build our niche multi-family housing business which is focused on distribution through property managers.

 

Lender-placed and voluntary homeowners insurance: The largest product line within Assurant Specialty Property is homeowners insurance, consisting principally of fire and dwelling hazard insurance offered through our lender-placed programs. The lender-placed program provides collateral protection to lenders, mortgage servicers and investors in mortgaged properties in the event that a homeowner does not maintain insurance on a mortgaged dwelling. Lender-placed insurance coverage is not limited to the outstanding loan balance; it provides structural coverage, similar to that of a standard homeowners policy. The policy is based on the replacement cost of the property and ensures that a home can be repaired or rebuilt completely in the event of damage. It protects both the lender’s interest and the borrower’s interest and equity. We also provide insurance to some of our clients on properties that have been foreclosed and are being managed by our clients. This type of insurance is called Real Estate Owned (“REO”) insurance. This market experienced significant growth in recent years as a result of the housing crisis, but is now stabilizing.

 

In the majority of cases, we use a proprietary insurance-tracking administration system linked with the administrative systems of our clients to continuously monitor the clients’ mortgage portfolios to verify the existence of insurance on each mortgaged property and identify those that are uninsured. If a potential lapse in insurance coverage is detected, we begin a process of notification and outreach to both the homeowner and the last-known insurance carrier or agent through phone calls and written correspondence. This process usually takes 75 days to complete. If at the end of this process we still cannot verify that insurance has not lapsed, a lender-placed policy is procured by the lender. The homeowner is still encouraged, and always maintains the option, to obtain or renew the insurance of his or her choice.

 

Lender-placed and voluntary manufactured housing insurance: Manufactured housing insurance is offered on a lender-placed and voluntary basis. Lender-placed insurance is issued after an insurance tracking process similar to that described above. The tracking is performed by Assurant Specialty Property using a proprietary insurance tracking administration system, or by the lenders themselves. A number of manufactured housing retailers in the U.S. use our proprietary premium rating technology to assist them in selling property coverages at the point of sale.

 

Other insurance: We believe there are opportunities to apply our lender-placed business model to other products and services. We have developed products in adjacent and emerging markets, such as the lender-placed flood and mandatory insurance rental markets. We also act as an administrator for the U.S. Government under the voluntary National Flood Insurance Program, for which we earn a fee for collecting premiums and processing claims. This business is 100% reinsured to the Federal Government.

 

Marketing and Distribution

 

Assurant Specialty Property establishes long-term relationships with leading mortgage lenders and servicers. The majority of our lender-placed agreements are exclusive. Typically these agreements have terms of three to five years and allow us to integrate our systems with those of our clients.

 

We offer our manufactured housing insurance programs primarily through manufactured housing lenders and retailers, along with independent specialty agents. The independent specialty agents distribute flood products and miscellaneous specialty property products. Multi-family housing products are distributed primarily through property management companies and affinity marketing partners.

 

Underwriting and Risk Management

 

Our lender-placed homeowners insurance program and certain of our manufactured home products are not underwritten on an individual policy basis. Contracts with our clients require us to automatically issue these policies when a borrower’s insurance coverage is not maintained. These products are priced to factor in the lack of individual policy underwriting. We monitor pricing adequacy based on a variety of factors and adjust pricing as required, subject to regulatory constraints.

 

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Because several of our product lines (such as homeowners, manufactured home, and other property policies) are exposed to catastrophe risks, we purchase reinsurance coverage to protect the capital of Assurant Specialty Property and to mitigate earnings volatility. Our reinsurance program generally incorporates a provision to allow the reinstatement of coverage, which provides protection against the risk of multiple catastrophes in a single year.

 

Assurant Health

 

     For the Years Ended  
     December 31, 2011     December 31, 2010  

Net earned premiums and other considerations:

    

Individual markets

   $ 1,286,236      $ 1,375,005   

Group markets

     473,653        489,117   
  

 

 

   

 

 

 

Total net earned premiums before premium rebates

     1,759,889        1,864,122   

Premium rebates (1)

     (41,589     —     
  

 

 

   

 

 

 

Total

   $ 1,718,300      $ 1,864,122   
  

 

 

   

 

 

 

Segment net income

   $ 40,886      $ 54,029   

Loss ratio (2)

     74.0     69.9

Expense ratio (3)

     26.3     29.7

Combined ratio (4)

     98.8     98.1

Equity (5)

   $ 405,199      $ 402,167   

 

(1) As of January 1, 2011, the Company began accruing premium rebates to comply with the minimum medical loss ratio requirements under the Affordable Care Act.
(2) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. (Fees and other income are not included in the above table.)
(4) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income. (Fees and other income are not included in the above table.)
(5) Equity excludes accumulated other comprehensive income.

 

Product and Services

 

Assurant Health competes in the individual medical insurance market by offering medical insurance and short-term medical insurance to individuals and families. Our products are offered with different plan options to meet a broad range of customer needs and levels of affordability. Assurant Health also offers medical insurance to small employer groups.

 

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”) were signed into law in March 2010 and represent significant changes to the current U.S. health care system. The legislation is far-reaching and is intended to expand access to health insurance coverage over time. The legislation includes requirements that most individuals obtain health insurance coverage beginning in 2014 and that most large employers offer coverage to their employees or they will be required to pay a financial penalty. In addition, the new laws encompass certain new taxes and fees, including limitations on the amount of compensation that is tax deductible and new fees which may not be deductible for income tax purposes.

 

The legislation will also impose new requirements and restrictions, including, but not limited to, guaranteed coverage requirements, prohibitions on some annual and all lifetime limits on amounts paid on behalf of or to our members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on product pricing.

 

One provision of the Affordable Care Act, effective January 1, 2011, established a minimum medical loss ratio (“MLR”) designed to ensure that a minimum percentage of premiums is paid for clinical services or health care quality improvement activities. 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

 

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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. Although the HHS has issued final regulations to implement the MLR and rebate provisions of the Affordable Care Act, certain issues remain to be fully resolved, including the response from the HHS to state insurance commissioners who have requested transitional relief from the MLR.

 

Although the dynamics and characteristics of the post-reform market will be different, we believe there are still significant opportunities for us to sell individual medical insurance products. Specialty expertise will still be required and we believe that we can earn adequate profits in this business over the long-term, without making large commitments of capital. In order to achieve these goals, we have taken significant steps to reduce operating and distribution costs and modify our product lines. During 2011, we reduced operating costs significantly through expense initiatives and redesigned our product portfolio to offer certain supplemental and affordable choice products. We continue to build on these efforts. We may refine our strategy as new regulations are issued or additional regulatory agency actions are taken in the wake of the Affordable Care Act. The full impact of the Affordable Care Act will not be known for many years, as it becomes effective at various dates over the next several years. We believe that the Affordable Care Act will lead to sweeping and fundamental changes to the U.S. health care system and the health insurance industry.

 

Individual Medical: Our medical insurance products are sold to individuals, primarily between the ages of 18 and 64, and their families, who do not have employer-sponsored coverage. We offer a wide variety of benefit plans at different price points, which allow customers to tailor their coverage to fit their unique needs.

 

Small Employer Group Medical: Our group medical insurance is primarily sold to small companies with two to fifty employees, although larger employer coverage is available. As of December 31, 2011, our average group size was approximately five employees.

 

We have entered into a new provider network arrangement with Aetna Signature Administrators® that becomes effective in March 2012. This multi-year agreement will provide our major medical customers with access to more than one million health care providers and 7,500 hospitals nationwide. Access to this network will enhance the competitiveness of Assurant Health for individuals, families, and small groups.

 

Marketing and Distribution

 

Our health insurance products are principally marketed through a network of independent agents. We also market through a variety of exclusive and non-exclusive national account relationships and direct distribution channels. In addition, we market our products through North Star Marketing, a wholly-owned affiliate that seeks business directly from independent agents. Since 2000, we have had an exclusive national marketing agreement with a major mutual insurance company whose captive agents market our individual health products. This agreement will expire in September 2018 and allows either company to exit the agreement with six months notice. We provide many of our products through a well-known association’s administrator under an agreement that automatically renews annually. We also have a long-term relationship with a national marketing organization with more than 50 offices.

 

Underwriting and Risk Management

 

Following the passage of the Affordable Care Act, many of the traditional risk management techniques used to manage the risks of providing health insurance have become less relevant. The Affordable Care Act places several constraints on underwriting and mandates minimum levels of benefits for most medical coverage. It also imposes minimum loss ratio standards on many of our policies. Assurant Health has taken steps to adjust its products, pricing and business practices to comply with the new requirements.

 

Please see “Management’s Discussion and Analysis—Assurant Health” and “Risk Factors—Risks Related to our Industry—Reform of the health insurance industry could make our health insurance business unprofitable” for further details.

 

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Assurant Employee Benefits

 

     For the Years Ended  
     December 31, 2011     December 31, 2010  

Net Earned Premiums and Other Considerations:

    

Group dental

   $ 417,145      $ 420,690   

Group disability (1)

     452,964        488,813   

Group life

     193,914        191,892   
  

 

 

   

 

 

 

Total

   $ 1,064,023      $ 1,101,395   
  

 

 

   

 

 

 

Segment net income

   $ 43,113      $ 63,538   

Loss ratio (2)

     72.2     69.6

Expense ratio (3)

     35.4     35.1

Equity (4)

   $ 621,666      $ 582,574   

 

(1) Includes single premiums for closed blocks.
(2) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. (Fees and other income are not included in the above table.)
(4) Equity excludes accumulated other comprehensive income.

 

Products and Services

 

We focus on the needs of businesses with fewer than 500 employees. We believe that our small group risk selection expertise, administrative systems, and strong relationships with brokers who work primarily with small businesses give us a competitive advantage versus other carriers.

 

We offer group disability, dental, vision, life and supplemental worksite products as well as individual dental products. The group products are offered with funding options ranging from fully employer-paid to fully employee-paid (voluntary). In addition, we reinsure disability and life products through our wholly owned subsidiary, Disability Reinsurance Management Services, Inc. (“DRMS”).

 

Group Disability: Group disability insurance provides partial replacement of lost earnings for insured employees who become disabled, as defined by their plan provisions. Our products include both short- and long-term disability coverage options. We also reinsure disability policies written by other carriers through our DRMS subsidiary.

 

Group Dental: Dental benefit plans provide funding for necessary or elective dental care. Customers may select a traditional indemnity arrangement, a PPO arrangement, or a prepaid or managed care arrangement. Coverage is subject to deductibles, coinsurance and annual or lifetime maximums. In a prepaid plan, members must use participating dentists in order to receive benefits.

 

Success in the group dental business is heavily dependent on a strong provider network. Assurant Employee Benefits owns and operates Dental Health Alliance, L.L.C., a leading dental Preferred Provider Organization (“PPO”) network. We also have an agreement with Aetna that allows us to use Aetna’s Dental Access ® network, which we believe increases the attractiveness of our products in the marketplace.

 

Group Vision: Fully-insured vision coverage is offered through our agreement with Vision Service Plan, Inc., a leading national supplier of vision insurance. Our plans cover eye exams, glasses, and contact lenses and are usually sold in combination with one or more of our other products.

 

Group Life: Group term life insurance provided through the workplace provides benefits in the event of death. We also provide accidental death and dismemberment insurance. Insurance consists primarily of renewable term life insurance with the amount of coverage provided being either a flat amount, a multiple of the employee’s earnings, or a combination of the two. We also reinsure life policies written by other carriers through DRMS.

 

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Supplemental Worksite Products: In addition to the traditional voluntary products, we provide group critical illness, cancer, accident, and gap insurance. These products are generally paid for by the employee through payroll deductions, and the employee is enrolled in the coverage(s) at the worksite.

 

Marketing and Distribution

 

Our products and services are distributed through a group sales force located in 34 offices near major metropolitan areas. Our sales representatives distribute our products and services through independent brokers and employee-benefits advisors. Daily account management is provided through the local sales offices, further supported by regional sales support centers and a home office customer service department. Compensation of brokers in some cases includes an annual performance incentive, based on volume and retention of business.

 

DRMS provides turnkey group disability and life insurance solutions to insurance carriers that want to supplement their core product offerings. Our services include product development, state insurance regulatory filings, underwriting, claims management, and other functions typically performed by an insurer’s back office. Assurant Employee Benefits reinsures the risks written by DRMS’ clients, with the clients generally retaining shares that vary by contract.

 

Underwriting and Risk Management

 

The pricing of our products is based on the expected cost of benefits, calculated using assumptions for mortality, morbidity, interest, expenses and persistency, and other underwriting factors. Our block of business is diversified by industry and geographic location, which serves to limit some of the risks associated with changing economic conditions.

 

Disability claims management focuses on helping claimants return to work through a supportive network of services that may include physical therapy, vocational rehabilitation, and workplace accommodation. We employ or contract with a staff of doctors, nurses and vocational rehabilitation specialists, and use a broad range of additional outside medical and vocational experts to assist our claim specialists.

 

Ratings

 

Independent rating organizations periodically review the financial strength of insurers, including our insurance subsidiaries. Financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contractholders. These ratings are not applicable to our common stock or debt securities. Ratings are an important factor in establishing the competitive position of insurance companies.

 

Rating agencies also use an “outlook statement” of “positive”, “stable”, “negative” or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a stable outlook to indicate that the rating is not expected to change; however, a stable rating does not preclude a rating agency from changing a rating at any time, without notice.

 

Most of our active domestic operating insurance subsidiaries are rated by the A.M. Best Company (“A.M. Best”). In addition, six of our domestic operating insurance subsidiaries are also rated by Moody’s Investor Services (“Moody’s”) and seven are rated by Standard & Poor’s Inc., a division of McGraw Hill Companies, Inc. (“S&P”).

 

For further information on the risks of ratings downgrades, see “Item 1A—Risk Factors—Risks Related to our Company—A.M. Best, Moody’s and S&P rate the financial strength of our insurance company subsidiaries, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.”

 

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The following table summarizes our financial strength ratings and outlook as of December 31, 2011:

 

     A.M. Best (1)      Moody’s (2)     Standard &
Poor’s (3)
 

Outlook

     Stable         (4     (5

Company

       

American Bankers Insurance Company

     A         A2        A-   

American Bankers Life Assurance Company

     A-         A3        A-   

American Memorial Life Insurance Company

     A-         N/A        A-   

American Reliable Insurance Company

     A         N/A        N/A   

American Security Insurance Company

     A         A2        A-   

Assurant Life of Canada

     A-         N/A        N/A   

Caribbean American Life Assurance Company

     A-         N/A        N/A   

Caribbean American Property Insurance Company

     A         N/A        N/A   

John Alden Life Insurance Company

     A-         A3        BBB   

Reliable Lloyds

     A         N/A        N/A   

Standard Guaranty Insurance Company

     A         N/A        N/A   

Time Insurance Company

     A-         A3        BBB   

UDC Dental California

     A-         N/A        N/A   

Union Security Dental Care New Jersey

     A-         N/A        N/A   

Union Security Insurance Company

     A-         A3        A-   

Union Security Life Insurance Company of New York

     A-         N/A        N/A   

United Dental Care of Arizona

     A-         N/A        N/A   

United Dental Care of Colorado

     A-         N/A        N/A   

United Dental Care of Michigan

     NR         N/A        N/A   

United Dental Care of Missouri

     A-         N/A        N/A   

United Dental Care of New Mexico

     A-         N/A        N/A   

United Dental Care of Ohio

     NR         N/A        N/A   

United Dental Care of Texas

     A-         N/A        N/A   

United Dental Care of Utah

     NR         N/A        N/A   

Voyager Indemnity Insurance Company

     A         N/A        N/A   

 

(1) A.M. Best financial strength ratings range from “A++” (superior) to “S” (suspended). Ratings of A and A- fall under the “excellent” category, which is the second highest of ten ratings categories.
(2) Moody’s insurance financial strength ratings range from “Aaa” (exceptional) to “C” (extremely poor). A numeric modifier may be appended to ratings from “Aa” to “Caa” to indicate relative position within a category, with 1 being the highest and 3 being the lowest. Ratings of A2 and A3 are considered “good” and fall within the third highest of the nine ratings categories.
(3) S&P’s insurer financial strength ratings range from “AAA” (extremely strong) to “R” (under regulatory supervision). A “+” or “-” may be appended to ratings from categories AA to CCC to indicate relative position within a category. Ratings of A- (strong) and BBB+ (adequate) are within the third and fourth highest of the nine ratings categories, respectively.
(4) Moody’s has a negative outlook on all of the ratings of the Companies, except for American Bankers Insurance Company and American Security Insurance Company, which have a stable outlook.
(5) S & P has a stable outlook on all of the ratings of the Companies, except for American Bankers Insurance Company and American Security Insurance Company, which have a positive outlook.

 

Enterprise Risk Management

 

As an insurer, we are exposed to a wide variety of financial, operational and other risks, as described in Item 1A, “Risk Factors.” Enterprise risk management (“ERM”) is, therefore, a key component of our business strategies, policies, and procedures. Our ERM process is an iterative approach with the following key phases:

 

1. Risk identification;
2. High-level estimation of risk likelihood and severity;
3. Risk prioritization at the business and enterprise levels;
4. Scenario analysis and detailed modeling of likelihood and severity for key enterprise risks;
5. Utilization of quantitative results and subject matter expert opinion to help guide business strategy and decision making;

 

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Through our ERM process and our enterprise risk quantification model we monitor a variety of risk metrics on an ongoing basis, with a particular focus on impact to net income (both GAAP and Statutory), company value and the potential need for capital infusions to subsidiaries under severe stress scenarios.

 

The Company’s ERM activities are coordinated by an Enterprise Risk Management Committee (“ERMC”), which includes managers from across the Company with knowledge of the Company’s business activities, including representation from Legal, Compliance, Actuarial, Audit, Finance, and Asset Management. The ERMC develops risk assessment and risk management policies and procedures. It facilitates the identification, reporting and prioritizing of risks faced by the Company, and is responsible for promoting a risk-aware culture throughout the organization. The ERMC also coordinates with each of the Company’s four Business Unit Risk Committees (“BURCs”), which meet regularly and are responsible for the identification of significant risks affecting their respective business units. Those risks which meet our internally-defined escalation criteria, including emerging risks, are then reported to the ERMC.

 

Our Board of Directors and senior management are responsible for overseeing significant enterprise risks. The ERMC reports regularly to the Chief Executive Officer and presents its work periodically to both the Board of Directors and the Finance and Investment Committee.

 

Through the use of regular committee meetings, business unit and enterprise risk inventory templates, risk dashboards, hypothetical scenario analysis, and quantitative modeling, the Company strives to identify, track, quantify, communicate and manage our key risks within prescribed tolerances.

 

Our ERM process continues to evolve, and, when appropriate, we incorporate methodology changes, policy modifications and emerging best practices on an ongoing basis.

 

Regulation

 

The Company is subject to extensive federal, state and international regulation and supervision in the jurisdictions where it does business. Regulations vary from jurisdiction to jurisdiction. The following is a summary of significant regulations that apply to our businesses and is not intended to be a comprehensive review of every regulation to which the Company is subject. For information on the risks associated with regulations applicable to the Company, please see Item 1A, “Risk Factors.”

 

U.S. Insurance Regulation

 

We are subject to the insurance holding company laws in the states where our insurance companies are domiciled. These laws generally require insurance companies within the insurance holding company system to register with the insurance departments of their respective states of domicile and to furnish reports to such insurance departments regarding capital structure, ownership, financial condition, general business operations and intercompany transactions. These laws also require that transactions between affiliated companies be fair and equitable. In addition, certain intercompany transactions, changes of control, certain dividend payments and transfers of assets between the companies within the holding company system are subject to prior notice to, or approval by, state regulatory authorities.

 

Like all U.S. insurance companies, our insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business. In general, this regulation is designed to protect the interests of policyholders, and not necessarily the interests of shareholders and other investors. To that end, the laws of the various states and other jurisdictions establish insurance departments with broad powers with respect to such things as:

 

   

licensing and authorizing companies and intermediaries (including agents and brokers) to transact business;

 

   

regulating capital, surplus and dividend requirements;

 

   

regulating underwriting limitations;

 

   

regulating companies’ ability to enter and exit markets or to provide, terminate or cancel certain coverages;

 

   

imposing statutory accounting and annual statement disclosure requirements;

 

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approving policy forms and mandating certain insurance benefits;

 

   

regulating premium rates, including the ability to disapprove or reduce the premium rates companies may charge;

 

   

regulating claims practices, including the ability to require companies to pay claims on terms other than those mandated by underlying policy contracts;

 

   

regulating certain transactions between affiliates;

 

   

regulating the content of disclosures to consumers;

 

   

regulating the type, amounts and valuation of investments;

 

   

mandating assessments or other surcharges for guaranty funds and the ability to recover such assessments in the future through premium increases; and

 

   

regulating market conduct and sales practices of insurers and agents.

 

Dividend Payment Limitations. The Company’s assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries. The ability to pay such dividends and to make such other payments is regulated by the states in which our subsidiaries are domiciled. These dividend regulations vary from state to state and by type of insurance provided by the applicable subsidiary, but generally require our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. For more information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements.”

 

Risk Based Capital Requirements. In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) has established certain risk-based capital standards applicable to life, health and property and casualty insurers. Risk-based capital, which regulators use to assess the sufficiency of an insurer’s statutory capital, is calculated by applying factors to various asset, premium, expense, liability and reserve items. Factors are higher for items which in the NAIC’s view have greater underlying risk. The NAIC periodically reviews the risk-based capital formula and changes to the formula could occur in the future.

 

Investment Regulation. Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. These regulations require diversification of insurance company investment portfolios and limit the amount of investments in certain asset categories.

 

Financial Reporting. Regulators closely monitor the financial condition of licensed insurance companies and our insurance subsidiaries are required to file periodic financial reports with insurance regulators. Moreover, states regulate the form and content of these statutory financial statements.

 

Products and Coverage. Insurance regulators have broad authority to regulate many aspects of our products and services. For example, some jurisdictions require insurers to provide coverage to persons who would not be considered eligible insurance risks under standard underwriting criteria, dictating the types of insurance and the level of coverage that must be provided to such applicants. Additionally, certain non-insurance products and services, such as service contracts, may be regulated by regulatory bodies other than departments of insurance.

 

Pricing and Premium Rates. Nearly all states have insurance laws requiring insurers to file price schedules and policy forms with the state’s regulatory authority. In many cases, these price schedules and/or policy forms must be approved prior to use, and state insurance departments have the power to disapprove increases or require decreases in the premium rates we charge.

 

Market Conduct Regulation. Activities of insurers are highly regulated by state insurance laws and regulations, which govern the form and content of disclosure to consumers, advertising, sales practices and complaint handling. State regulatory authorities enforce compliance through periodic market conduct examinations.

 

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Guaranty Associations and Indemnity Funds. Most states require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies. These associations may levy assessments on member insurers. In some states member insurers can recover a portion of these assessments through premium tax offsets and/or policyholder surcharges.

 

Insurance Regulatory Initiatives. The NAIC, state regulators and professional organizations have considered and are considering various proposals that may alter or increase state authority to regulate insurance companies and insurance holding companies. Please see Item 1A, “Risk Factors—Risks Related to Our Industry—Changes in regulation may reduce our profitability and limit our growth” for a discussion of the risks related to such initiatives.

 

Federal Regulation

 

Patient Protection and Affordable Care Act. Although health insurance is generally regulated at the state level, recent legislative actions were taken at the federal level that impose added restrictions on our business, in particular Assurant Health and Assurant Employee Benefits. In March 2010, President Obama signed the Affordable Care Act into law. Provisions of the Affordable Care Act and related reforms have and will continue to become effective at various dates over the next several years. These provisions and related impacts include a requirement that we pay rebates to customers if the loss ratios for some of our products lines are less than specified percentages; the reduction of agent commissions, and the consequent risk that insurance producers may sell less of our products than they have in the past; changes in the benefits provided under some of our products; elimination of limits on lifetime and annual benefit maximums; a prohibition from imposing any pre-existing condition exclusion as it applies to enrollees under the age of 19 who apply for coverage; limits on our ability to rescind coverage for persons who have misrepresented or omitted material information when they applied for coverage and, after January 1, 2014, elimination of our ability to underwrite health insurance products with certain narrow exceptions; a requirement to offer coverage to any person who applies for such coverage; increased costs to modify and/or sell our products; intensified competitive pressures that limit our ability to increase rates due to state insurance exchanges; significant risk of customer loss; new and higher taxes and fees; and the need to operate with a lower expense structure at both the business segment and enterprise level.

 

Employee Retirement Income Security Act. Because we provide products and services for certain U.S. employee benefit plans, we are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA places certain requirements on how the Company may do business with employers that maintain employee benefit plans covered by ERISA. Among other things, regulations under ERISA set standards for certain notice and disclosure requirements and for claim processing and appeals. In addition, some of our administrative services and other activities may also be subject to regulation under ERISA.

 

HIPAA, HITECH Act and Gramm-Leach-Bliley Act. The Health Insurance Portability and Accountability Act of 1996, along with its implementing regulations (“HIPAA”), impose various requirements on health insurers, HMOs, health plans and health care providers. Among other things, Assurant Health and Assurant Employee Benefits are subject to HIPAA regulations requiring certain guaranteed issuance and renewability of health insurance coverage for individuals and small groups (generally groups with 50 or fewer employees) and limitations on exclusions based on pre-existing conditions.

 

HIPAA also imposes requirements on health insurers, health plans and health care providers to ensure the privacy and security of protected health information. These privacy and security provisions were further expanded by the privacy provisions contained in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), which enhances penalties for violations of HIPAA and requires regulated entities to provide notice of security breaches of protected health information to individuals and HHS. In addition, certain of our activities are subject to the privacy regulations of the Gramm-Leach-Bliley Act, which, along with regulations adopted thereunder, generally requires insurers to provide customers with notice regarding how their non-public personal health and financial information is used, and to provide them with the opportunity to “opt out” of certain disclosures.

 

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Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which implements comprehensive changes to the regulation of financial services in the U.S. Among other things, Congress created the Consumer Financial Protection Bureau (the “CFPB”). While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulations promulgated by the CFPB may extend its authority more broadly to cover these products and thereby affect the Company or our clients.

 

In addition, the Dodd-Frank Act establishes a Federal Insurance Office within the Department of the Treasury, headed by a director appointed by the Secretary of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance (other than health insurance) and is required to conduct a study on how to modernize and improve the system of insurance regulation in the U.S., including by increased national uniformity through either a federal charter or effective action by the states.

 

International Regulation

 

We are subject to regulation and supervision of our international operations in various jurisdictions. These regulations, which vary depending on the jurisdiction, include anti-corruption laws; solvency regulations; various privacy, insurance, tax, tariff and trade laws and regulations; and corporate, employment, intellectual property and investment laws and regulations.

 

In addition to the U.S., the Company operates in Canada, the U.K., Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Mexico and China, and our operations are supervised by regulatory authorities of these jurisdictions. For example, our operations in the U.K. are subject to regulation by the Financial Services Authority (the “FSA”). Insurers authorized by the FSA are generally permitted to operate throughout the rest of the European Union, subject to satisfying certain FSA requirements and, in some cases, meeting additional local regulatory requirements.

 

We are also subject to certain U.S. and foreign laws applicable to businesses generally, including anti-corruption laws. The Foreign Corrupt Practices Act of 1977 (the “FCPA”) regulates U.S. companies in their dealings with foreign officials, prohibiting bribes and similar practices. In addition, the U.K. Anti-Bribery Act, which became effective during 2011, has wide jurisdiction over certain activities that affect the U.K.

 

Securities and Corporate Governance Regulation

 

As a company with publicly-traded securities, Assurant is subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”) relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. Additionally, Assurant, Inc. is subject to the corporate governance laws of Delaware, its state of incorporation.

 

Environmental Regulation

 

Because we own and operate real property, we are subject to federal, state and local environmental laws. Potential environmental liabilities and costs in connection with any required remediation of such properties is an inherent risk in property ownership and operation. Under the laws of several states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of the cleanup, which could have priority over the lien of an existing mortgage against the property and thereby impair our ability to foreclose on that property should the related loan be in default. In addition, under certain circumstances, we may be liable for the costs of addressing releases or threatened releases of hazardous substances at properties securing mortgage loans held by us.

 

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Other Information

 

Customer Concentration

 

No one customer or group of affiliated customers accounts for 10% or more of the Company’s consolidated revenues.

 

Employees

 

We had approximately 14,100 employees as of February 15, 2012. Assurant Solutions has employees in Argentina, Brazil, Italy, Spain and Mexico that are represented by labor unions and trade organizations. We believe that employee relations are satisfactory.

 

Sources of Liquidity

 

For a discussion of the Company’s sources and uses of funds, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Note 14 to the Consolidated Financial Statements contained elsewhere in this report.

 

Taxation

 

For a discussion of tax matters affecting the Company and its operations, see Note 7 to the Consolidated Financial Statements contained elsewhere in this report.

 

Financial Information about Reportable Business Segments

 

For financial information regarding reportable business segments of the Company, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 22 to the Consolidated Financial Statements contained elsewhere in this report.

 

Available Information

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the Statements of Beneficial Ownership of Securities on Forms 3, 4 and 5 for our Directors and Officers and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the SEC website at www.sec.gov . These documents are also available free of charge through the Investor Relations page of our website ( www.assurant.com ) as soon as reasonably practicable after filing. Other information found on our website is not part of this or any other report filed with or furnished to the SEC.

 

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Item 1A. Risk Factors.

 

Certain factors may have a material adverse effect on our business, financial condition and results of operations and you should carefully consider them. It is not possible to predict or identify all such factors.

 

Risks Related to Our Company

 

Our revenues and profits may decline if we were unable to maintain relationships with significant clients, distributors and other parties important to the success of our business.

 

Our relationships and contractual arrangements with significant clients, distributors, original equipment manufacturers and other parties with whom we do business are important to the success of our segments. Many of these arrangements are exclusive. For example, in Assurant Solutions, we have exclusive relationships with retailers and financial and other institutions through which we distribute our products, including an exclusive distribution relationship with SCI relating to the distribution of our preneed insurance policies. In Assurant Specialty Property, we have exclusive relationships with mortgage lenders and manufactured housing lenders, manufacturers and property managers. In Assurant Health, we have exclusive distribution relationships for our individual health insurance products with a major mutual insurance company as well as a relationship with a well-known association through which we provide many of our individual health insurance products. We also have a new provider network arrangement with a national PPO network. We also maintain contractual relationships with several separate networks of health and dental care providers, each referred to as a PPO, through which we obtain discounts. In Assurant Employee Benefits, we have relationships through DRMS with group insurance carriers to reinsure their disability and life insurance product offerings. Typically, these relationships and contractual arrangements have terms ranging from one to five years.

 

Although we believe we have generally been successful in maintaining our clients, distribution and associated relationships, if these parties decline to renew or seek to terminate these arrangements or seek to renew these contracts on terms less favorable to us, our results of operations and financial condition could be materially adversely affected. For example, a loss of one or more of the discount arrangements with PPOs could lead to higher medical or dental costs and/or a loss of members to other medical or dental plans. In addition, we are subject to the risk that these parties may face financial difficulties, reputational issues or problems with respect to their own products and services, which may lead to decreased sales of our products and services. Moreover, if one or more of our clients or distributors consolidate or align themselves with other companies, we may lose business or suffer decreased revenues.

 

Sales of our products and services may be reduced if we are unable to attract and retain sales representatives or to develop and maintain distribution sources.

 

We distribute many of our insurance products and services through a variety of distribution channels, including independent employee benefits specialists, brokers, managing general agents, life agents, financial institutions, mortgage lenders and servicers, retailers, funeral homes, association groups and other third-party marketing organizations.

 

Our relationships with these distributors are significant both for our revenues and profits. We do not distribute our insurance products and services through captive or affiliated agents. In Assurant Health, we depend in large part on the services of independent agents and brokers and on associations in the marketing of our products. In Assurant Employee Benefits, independent agents and brokers who act as advisors to our customers market and distribute our products. Strong competition exists among insurers to form relationships with agents and brokers of demonstrated ability. We compete with other insurers for relationships with agents, brokers, and other intermediaries primarily on the basis of our financial position, support services, product features, and more generally through our ability to meet the needs of their clients, our customers. Independent agents and brokers are typically not exclusively dedicated to us, but instead usually also market the products of our competitors and therefore we face continued competition from our competitors’ products. Moreover, our ability to market our products and services depends on our ability to tailor our channels of distribution to comply with changes in the regulatory environment in which we and such agents and brokers operate.

 

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The minimum loss ratios imposed by the Affordable Care Act compelled health insurers to decrease broker commission levels beginning in 2011. Similarly, the Company decreased its commission levels for distribution channels that market Assurant Health’s individual medical and small employer group medical products. Although the Company believes that its revised commission schedules are competitive with those of other health insurers adapting to the new reform environment, this reduction caused uncertainty among agents during 2011 as they evaluated the effect of new commission levels on their business, which contributed to a decrease in sales. The reduction could pressure our relationship with the distribution channels that we rely on to market our Assurant Health products and/or our ability to attract new brokers and agents, which could materially adversely affect our results of operations and financial condition. In addition, many of the agents and brokers who distribute Assurant Employee Benefits products make a large part of their living from sales of health insurance. To the extent that some of them decide to pursue other occupations, the resulting loss of distribution could have a material adverse impact on the sales of Assurant Employee Benefits’ products.

 

We have our own sales representatives whose distribution process varies by segment. We depend in large part on our sales representatives to develop and maintain client relationships. Our inability to attract and retain effective sales representatives could materially adversely affect our results of operations and financial condition.

 

General economic, financial market and political conditions may materially adversely affect our results of operations and financial conditions. Particularly, difficult conditions in financial markets and the global economy may negatively affect the results of all of our business segments.

 

General economic, financial market and political conditions may have a material adverse effect on our results of operations and financial condition. Limited availability of credit, deteriorations of the global mortgage and real estate markets, declines in consumer confidence and consumer spending, increases in prices or in the rate of inflation, continuing high unemployment, or disruptive geopolitical events could contribute to increased volatility and diminished expectations for the economy and the markets, including the market for our stock. These conditions could also affect all of our business segments. Specifically, during periods of economic downturn:

 

   

individuals and businesses may (i) choose not to purchase our insurance products, warranties and other related products and services, (ii) terminate existing policies or contracts or permit them to lapse, (iii) choose to reduce the amount of coverage they purchase, and (iv) in the case of business customers of Assurant Health or Assurant Employee Benefits, have fewer employees requiring insurance coverage due to reductions in their staffing levels;

 

   

clients are more likely to experience financial distress or declare bankruptcy or liquidation which could have an adverse impact on the remittance of premiums from such clients as well as the collection of receivables from such clients for items such as unearned premiums;

 

   

disability insurance claims and claims on other specialized insurance products tend to rise;

 

   

there is a higher loss ratio on credit card and installment loan insurance due to rising unemployment and disability levels;

 

   

there is an increased risk of fraudulent insurance claims;

 

   

insureds tend to increase their utilization of health and dental benefits if they anticipate becoming unemployed or losing benefits; and

 

   

substantial decreases in loan availability and origination could reduce the demand for credit insurance that we write or debt cancellation or debt deferment products that we administer, and on the placement of hazard insurance under our lender-placed insurance programs.

 

Recently, the global recession and disruption of the financial markets have heightened concerns over the sovereign debt crisis in Europe, particularly with respect to capital markets access and the solvency of certain

 

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European Union (“EU”) member states, including Portugal, Ireland, Italy, Greece and Spain, and of financial institutions that have significant direct or indirect exposure to debt issued by these countries. Certain major rating agencies have downgraded the sovereign debt of Greece, Portugal, Ireland, Italy and Spain. The issues arising out of the sovereign debt crisis may transcend Europe, cause investors to lose confidence in European financial institutions and the stability of EU member economies, and likewise affect U.S. financial institutions, the stability of the global financial markets and any economic recovery.

 

In addition, general inflationary pressures may affect the costs of medical and dental care, as well as repair and replacement costs on our real and personal property lines, increasing the costs of paying claims. Inflationary pressures may also affect the costs associated with our preneed insurance policies, particularly those that are guaranteed to grow with the Consumer Price Index (or “CPI”). Conversely, deflationary pressures may affect the pricing of our products.

 

Our earnings and book value per share could be materially affected by an impairment of goodwill.

 

Goodwill represented $639,097 of our $27,115,445 in total assets as of December 31, 2011. We review our goodwill annually in the fourth quarter for impairment or more frequently if circumstances indicating that the asset may be impaired exist. Such circumstances could include a sustained significant decline in our share price, a decline in our actual or expected future cash flows or income, a significant adverse change in the business climate, or slower growth rates, among others. Circumstances such as those mentioned above could trigger an impairment of some or all of the remaining goodwill on our balance sheet, which could have a material adverse effect on our profitability and book value per share. For more information on our annual goodwill impairment testing and the goodwill of our segments, please see “Item 7—MD&A—Critical Factors Affecting Results—Value and Recoverability of Goodwill.”

 

Competitive pressures or regulators could force us to reduce our rates.

 

The premiums we charge are subject to review by regulators. If they consider our loss ratios to be too low, they could require us to reduce our rates. In addition, competitive conditions may put pressure on our rates. In either case, significant rate reductions could materially reduce our profitability.

 

Catastrophe losses, including man-made catastrophe losses, could materially reduce our profitability and have a material adverse effect on our results of operations and financial condition.

 

Our insurance operations expose us to claims arising out of catastrophes, particularly in our homeowners, life and other personal lines of business. We have experienced, and expect to experience, catastrophe losses that materially reduce our profitability or have a material adverse effect on our results of operations and financial condition. Catastrophes can be caused by various natural events, including, but not limited to, hurricanes, windstorms, earthquakes, hailstorms, severe winter weather, fires, epidemics and the long-term effects of climate change, or can be man-made catastrophes, including terrorist attacks or accidents such as airplane crashes. While the frequency and severity of catastrophes are inherently unpredictable, increases in the value and geographic concentration of insured property, the geographic concentration of insured lives, and the effects of inflation could increase the severity of claims from future catastrophes.

 

Catastrophe losses can vary widely and could significantly exceed our expectations. They may cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or materially adversely affect our financial condition. Our ability to write new business also could be affected.

 

Accounting rules do not permit insurers to reserve for such catastrophic events before they occur. In addition, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded reserves and such variance may have a material adverse effect on our results of operations and financial condition.

 

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If the severity of an event were sufficiently high (for example, in the event of an extremely large catastrophe), it could exceed our reinsurance coverage limits and could have a material adverse effect on our results of operations and financial condition. We may also lose premium income due to a large-scale business interruption caused by a catastrophe combined with legislative or regulatory reactions to the event.

 

We use catastrophe modeling tools that help estimate our exposure to such events, but these tools are based on historical data and other assumptions that may provide projections that are materially different from the actual events.

 

Because Assurant Specialty Property’s lender-placed homeowners and lender-placed manufactured housing insurance products are designed to automatically provide property coverage for client portfolios, our concentration in certain catastrophe-prone states like Florida, California and Texas may increase in the future. Furthermore, the withdrawal of other insurers from these or other states may lead to adverse selection and increased use of our products in these areas and may negatively affect our loss experience.

 

The exact impact of the physical effects of climate change is uncertain. It is possible that changes in the global climate may cause long-term increases in the frequency and severity of storms, resulting in higher catastrophe losses, which could materially affect our results of operations and financial condition.

 

Our group life and health insurance operations could be materially impacted by catastrophes such as a terrorist attack, a natural disaster, a pandemic or an epidemic that causes a widespread increase in mortality or disability rates or that causes an increase in the need for medical care. In addition, with respect to our preneed insurance policies, the average age of policyholders is approximately 73 years. This group is more susceptible to certain epidemics than the overall population, and an epidemic resulting in a higher incidence of mortality could have a material adverse effect on our results of operations and financial condition.

 

A.M. Best, Moody’s, and S&P rate the financial strength of our insurance company subsidiaries, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.

 

Ratings are an important factor in establishing the competitive position of insurance companies. A.M. Best rates most of our domestic operating insurance subsidiaries. Moody’s rates six of our domestic operating insurance subsidiaries and S&P rates seven of our domestic operating insurance subsidiaries. These ratings are subject to periodic review by A.M. Best, Moody’s, and S&P, and we cannot assure that we will be able to retain them. In 2011 for example, S&P lowered the financial strength rating of two of our rated life and health insurance subsidiaries from BBB+ to BBB, citing pressure on Assurant Health’s earnings resulting from changes related to the Affordable Care Act. Moody’s currently has a negative outlook on our life and health insurance subsidiaries, as well as our senior debt rating, primarily citing the adverse consequences of the Affordable Care Act on our life and health insurance subsidiaries.

 

Rating agencies may change their methodology or requirements for determining ratings, or they may become more conservative in assigning ratings. Rating agencies or regulators could also increase capital requirements for the Company or its subsidiaries. Any reduction in our ratings could materially adversely affect the demand for our products from intermediaries and consumers, and materially adversely affect our results. In addition, any reduction in our financial strength ratings could materially adversely affect our cost of borrowing.

 

As of December 31, 2011, contracts representing approximately 17% of Assurant Solutions’ and 26% of Assurant Specialty Property’s net earned premiums and fee income contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings ranging from “A” or better to “B” or better, depending on the contract. Our clients may terminate these contracts or fail to renew them if the subsidiaries’ ratings fall below these minimums. Under our marketing agreement with SCI, American Memorial Life Insurance Company (“AMLIC”), one of our subsidiaries, is required to maintain an A.M. Best financial strength rating of “B” or better throughout the term of the agreement. If AMLIC fails to maintain this rating for a period of 180 days, SCI may terminate the agreement.

 

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Additionally, certain contracts in the DRMS business, representing approximately 7% of Assurant Employee Benefits’ net earned premiums for the year ended December 31, 2011 contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings of “A-” or better. DRMS clients may terminate the agreements and, in some instances, recapture in-force business if the ratings of applicable subsidiaries fall below “A-”. Similarly, distribution and service agreements representing approximately 18% of Assurant Health’s earned premiums gross of rebates for the year ended December 31, 2011 contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings of “A-” or better, for the distribution agreements, or “B+” or better, for the service agreement. If the ratings of applicable Assurant Health subsidiaries fall below these threshold ratings levels, distribution and service partners could terminate their agreements. Termination or failure to renew these agreements could materially and adversely affect our results of operations and financial condition.

 

Our actual claims losses may exceed our reserves for claims, and this may require us to establish additional reserves that may materially reduce our earnings, profitability and capital.

 

We maintain reserves to cover our estimated ultimate exposure for claims and claim adjustment expenses with respect to reported claims and incurred but not reported claims (“IBNR”) as of the end of each accounting period. Reserves, whether calculated under GAAP, Statutory Accounting Principles (“SAP”) or accounting principles required in foreign jurisdictions, do not represent an exact calculation of exposure. Reserving is inherently a matter of judgment; our ultimate liabilities could exceed reserves for a variety of reasons, including changes in macroeconomic factors (such as unemployment and interest rates), case development and other factors. We also adjust our reserves from time to time as these factors and our claims experience changes. Reserve development and paid losses exceeding corresponding reserves could have a material adverse effect on our earnings.

 

Unfavorable conditions in the capital and credit markets may significantly and adversely affect our access to capital and our ability to pay our debts or expenses.

 

In recent years, the global capital and credit markets experienced extreme volatility and disruption. In many cases, companies’ ability to raise money was severely restricted. Although conditions in the capital and credit markets have improved significantly, they could again deteriorate. Our ability to borrow or raise money is important if our operating cash flow is insufficient to pay our expenses, meet capital requirements, repay debt, pay dividends on our common stock or make investments. The principal sources of our liquidity are insurance premiums, fee income, cash flow from our investment portfolio and liquid assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short- and long-term instruments.

 

If our access to capital markets is restricted, our cost of capital could go up, thus decreasing our profitability and reducing our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially and adversely affected by disruptions in the capital markets.

 

The value of our investments could decline, affecting our profitability and financial strength.

 

Investment returns are an important part of our profitability. Significant fluctuations in the fixed maturity market could impair our profitability, financial condition and/or cash flows. Our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. In addition, certain factors affecting our business, such as volatility of claims experience, could force us to liquidate securities prior to maturity, causing us to incur capital losses. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

 

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Market conditions, changes in interest rates, and prolonged periods of low interest rates may materially affect our results.

 

Recent periods have been characterized by low interest rates. A prolonged period during which interest rates remain at historically low levels may result in lower-than-expected net investment income and larger required reserve increases. In addition, certain statutory capital requirements are based on formulas or models that consider interest rates, and a prolonged period of low interest rates may increase the statutory capital we are required to hold.

 

Changes in interest rates may materially adversely affect the performance of some of our investments. Interest rate volatility may increase or reduce unrealized gains or unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fixed maturity and short-term investments represented 83% of the fair value of our total investments as of December 31, 2011.

 

The fair market value of the fixed maturity securities in our portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. Because all of our fixed maturity securities are classified as available for sale, changes in the market value of these securities are reflected in our balance sheet. Their fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income from fixed-maturity investments increases or decreases directly with interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An increase in interest rates will also increase the net unrealized losses in our current investment portfolio.

 

We employ asset/liability management strategies to reduce the adverse effects of interest rate volatility and to increase the likelihood that cash flows are available to pay claims as they become due. Our asset/liability management strategies may fail to eliminate or reduce the adverse effects of interest rate volatility, and significant fluctuations in the level of interest rates may have a material adverse effect on our results of operations and financial condition. If our investment portfolio is not appropriately matched with our insurance liabilities, we could also be forced to liquidate investments prior to maturity at a significant loss to pay claims and policyholder benefits.

 

Our preneed insurance policies are generally whole life insurance policies with increasing death benefits. In extended periods of declining interest rates or rising inflation, there may be compression in the spread between the death benefit growth rates on these policies and the investment income that we can earn, resulting in a negative spread. As a result, declining interest rates or high inflation rates may have a material adverse effect on our results of operations and our overall financial condition. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Inflation Risk” for additional information.

 

Assurant Employee Benefits calculates reserves for long-term disability and life waiver of premium claims using net present value calculations based on interest rates at the time reserves are established and expectations regarding future interest rates. Waiver of premium refers to a provision in a life insurance policy pursuant to which an insured with a disability that lasts for a specified period no longer has to pay premiums for the duration of the disability or for a stated period, during which time the life insurance coverage continues. If interest rates decline, reserves for open and/or new claims in Assurant Employee Benefits would need to be calculated using lower discount rates, thereby increasing the net present value of those claims and the required reserves. Depending on the magnitude of the decline, such changes could have a material adverse effect on our results of operations and financial condition. In addition, investment income may be lower than that assumed in setting premium rates.

 

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Our investment portfolio is subject to various risks that may result in realized investment losses.

 

We are subject to credit risk in our investment portfolio, primarily from our investments in corporate bonds, preferred stocks, leveraged loans, municipal bonds, and commercial mortgages. Defaults by third parties in the payment or performance of their obligations could reduce our investment income and realized investment gains or result in the continued recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the corporate bonds included in the portfolio and by other factors that may result in the continued recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.

 

Further, the value of any particular fixed maturity security is subject to impairment based on the creditworthiness of a given issuer. As of December 31, 2011, fixed maturity securities represented 80% of the fair value of our total invested assets. Our fixed maturity portfolio also includes below investment grade securities (rated “BB” or lower by nationally recognized securities rating organizations). These investments comprise approximately 6% of the fair value of our total investments as of December 31, 2011 and generally provide higher expected returns, but present greater risk and can be less liquid than investment grade securities. A significant increase in defaults and impairments on our fixed maturity investment portfolio could materially adversely affect our results of operations and financial condition. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk” for additional information on the composition of our fixed maturity investment portfolio.

 

We currently invest in a small amount of equity securities (approximately 3% of the fair value of our total investments as of December 31, 2011). However, we have had higher percentages in the past and may make more such investments in the future. Investments in equity securities generally provide higher expected total returns, but present greater risk to preservation of capital than our fixed maturity investments. Recent volatility in the equity markets has led, and may continue to lead, to a decline in the market value of our investments in equity securities.

 

If treasury rates or credit spreads were to increase, the Company may have additional realized and unrealized investment losses and increases in other-than-temporary impairments. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Inherently, there are risks and uncertainties involved in making these judgments. Changes in facts, circumstances, or critical assumptions could cause management to conclude that further impairments have occurred. This could lead to additional losses on investments. For further details on net investment losses and other-than-temporary-impairments, please see Note 4 to the Consolidated Financial Statements included elsewhere in this report.

 

Derivative instruments generally present greater risk than fixed maturity investments or equity investments because of their greater sensitivity to market fluctuations. Since August 1, 2003, we have been using derivative instruments to manage the exposure to inflation risk created by our preneed insurance policies that are tied to the CPI. However, the protection provided by these derivative instruments would be limited if there were a sharp increase in inflation on a sustained long-term basis which could have a material adverse effect on our results of operations and financial condition.

 

Our commercial mortgage loans and real estate investments subject us to liquidity risk.

 

Our commercial mortgage loans on real estate investments (which represented approximately 9% of the fair value of our total investments as of December 31, 2011) are relatively illiquid. If we require extremely large amounts of cash on short notice, we may have difficulty selling these investments at attractive prices and/or in a timely manner.

 

The risk parameters of our investment portfolio may not assume an appropriate level of risk, thereby reducing our profitability and diminishing our ability to compete and grow.

 

In pricing our products and services, we incorporate assumptions regarding returns on our investments. Accordingly, our investment decisions and objectives are a function of the underlying risks and product profiles

 

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of each of our operating segments. Market conditions may not allow us to invest in assets with sufficiently high returns to meet our pricing assumptions and profit targets over the long term. If, in response, we choose to increase our product prices, our ability to compete and grow may be diminished.

 

Environmental liability exposure may result from our commercial mortgage loan portfolio and real estate investments.

 

Liability under environmental protection laws resulting from our commercial mortgage loan portfolio and real estate investments may weaken our financial strength and reduce our profitability. For more information, please see Item 1, “Business—Regulation—Environmental Regulation.”

 

We face risks associated with our international operations.

 

Our international operations face political, legal, operational and other risks that we may not face in our domestic operations. For example, we may face the risk of restrictions on currency conversion or the transfer of funds; burdens and costs of compliance with a variety of foreign laws; political or economic instability in countries in which we conduct business, including possible terrorist acts; foreign exchange rate fluctuations; diminished ability to legally enforce our contractual rights; differences in cultural environments and unexpected changes in regulatory requirements; exposure to local economic conditions and restrictions on the withdrawal of non-U.S. investment and earnings; and potentially substantial tax liabilities if we repatriate the cash generated by our international operations back to the U.S. If our business model is not successful in a particular country, we may lose all or most of our investment in that country. In addition, as we engage with international clients, we have made certain up-front commission payments, which we may not recover if the business does not materialize as we expect. As our international business grows, we rely increasingly on fronting carriers or intermediaries in other countries to maintain their licenses and product approvals, satisfy local regulatory requirements and continue in business.

 

For information on the significant international regulations that apply to our Company, please see Item 1, “Business—Regulation—International Regulation.”

 

Fluctuations in the exchange rate of the U.S. dollar and other foreign currencies may materially and adversely affect our results of operations.

 

While most of our costs and revenues are in U.S. dollars, some are in other currencies. Because our financial results in certain countries are translated from local currency into U.S. dollars upon consolidation, the results of our operations may be affected by foreign exchange rate fluctuations. We do not currently hedge foreign currency risk. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenue, operating expenses, and net income or loss. Similarly, our net assets, net revenue, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. These fluctuations in currency exchange rates may result in gains or losses that materially and adversely affect our results of operations.

 

Unanticipated changes in tax provisions or exposure to additional income tax liabilities could materially and adversely affect our results.

 

In accordance with applicable income tax guidance, the Company must determine whether its ability to realize the value of its deferred tax asset in the future is classified as “more likely than not.” Under the income tax guidance, a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward periods.

 

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In determining the appropriate valuation allowance, management made certain judgments relating to recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of expected future taxable income and available tax planning strategies. The assumptions in making these judgments are updated periodically on the basis of current business conditions affecting the Company and overall economic conditions. These management judgments are therefore subject to change due to factors that include, but are not limited to, changes in our ability to realize expected capital gains in the foreseeable future or in our ability to execute other tax planning strategies. Management will continue to assess and determine the need for, and the amount of, the valuation allowance in subsequent periods. Any change in the valuation allowance could have a material impact on our results of operations and financial condition.

 

Failure to protect our clients’ confidential information and privacy could result in the loss of reputation and customers, reduce our profitability and/or subject us to fines, litigation and penalties, and the costs of compliance with privacy and security laws could adversely affect our business.

 

Our businesses are subject to a variety of privacy regulations and confidentiality obligations. If we do not properly comply with privacy and security laws and regulations that require us to protect confidential information, we could experience adverse consequences, including loss of customers and related revenue, regulatory problems (including fines and penalties), loss of reputation and civil litigation, which could adversely affect our business and results of operations. As have other entities in the health care industry, we have incurred and will continue to incur substantial costs in complying with the requirements of applicable privacy and security laws. For more information on the privacy and security laws that apply to us, please see Item 1, “Business—Regulation.”

 

The failure to effectively maintain and modernize our information systems could adversely affect our business.

 

Our business is dependent upon our ability to maintain the effectiveness of existing technology systems, enhance technology to support the Company’s business in an efficient and cost-effective manner, and keep current with technological advances, evolving industry and regulatory standards and customer needs. In addition, our ability to keep our systems integrated with those of our clients is critical to the success of our business. If we do not effectively maintain our systems and update them to address technological advancements, our relationships and ability to do business with our clients may be adversely affected. We could also experience other adverse consequences, including unfavorable underwriting and reserving decisions, internal control deficiencies and security breaches resulting in loss of data. System development projects may be more costly or time-consuming than anticipated and may not deliver the expected benefits upon completion.

 

Failure to successfully manage outsourcing activities could adversely affect our business.

 

As we seek to improve operating efficiencies across the business, we have outsourced and may outsource selected functions to third parties. We take steps to monitor and regulate the performance of these independent third parties to whom the Company has outsourced these functions. If these third parties fail to satisfy their obligations to the Company as a result of their performance, changes in their operations, financial condition or other matters beyond our control, the Company’s operations, information, service standards and data could be compromised. In addition, to the extent the Company outsources selected services or functions to third parties outside the United States, the Company is exposed to the risks that accompany operations in a foreign jurisdiction, including international economic and political conditions, foreign laws and fluctuations in currency values. If third party providers do not perform as anticipated, we may not fully realize the anticipated economic and other benefits of these outsourcing projects, which could adversely affect our results of operations and financial condition.

 

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System security risks, data protection breaches and cyber-attacks could adversely affect our business and results of operations.

 

Our information technology systems are vulnerable to threats from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Although we have network security measures in place, experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise confidential information, create system disruptions or cause shutdowns.

 

As an insurer, we receive and are required to protect confidential information from customers, vendors and other third parties that may include personal health or financial information. To the extent any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information or that of others, it could cause significant damage to our reputation, affect our relationships with our customers and clients, lead to claims against the Company, result in regulatory action and ultimately harm our business. In addition, we may be required to incur significant costs to mitigate the damage caused by any security breach, or to protect against future damage.

 

We may be unable to accurately price for benefits, claims and other costs, which could reduce our profitability.

 

Our profitability could vary depending on our ability to predict and price for benefits, claims and other costs including, but not limited to, medical and dental costs and the frequency and severity of property claims. This ability could be affected by factors such as inflation, changes in the regulatory environment, changes in industry practices, changes in legal, social or environmental conditions, or new technologies. The inability to accurately price for benefits, claims and other costs could materially adversely affect our results of operations and financial condition.

 

Reinsurance may not be available or adequate to protect us against losses, and we are subject to the credit risk of reinsurers.

 

As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various operating segments. Although the reinsurer is liable to us for claims properly ceded under the reinsurance arrangements, we remain liable to the insured as the direct insurer on all risks reinsured. Ceded reinsurance arrangements therefore do not eliminate our obligation to pay claims. We are subject to credit risk with respect to our ability to recover amounts due from reinsurers. The inability to collect amounts due from reinsurers could materially adversely affect our results of operations and our financial condition.

 

Reinsurance for certain types of catastrophes could become unavailable or prohibitively expensive for some of our businesses. In such a situation, we might also be adversely affected by state regulations that prohibit us from excluding catastrophe exposures or from withdrawing from or increasing premium rates in catastrophe-prone areas.

 

Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain our current reinsurance facilities and, even where highly desirable or necessary, we may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. Inability to obtain reinsurance at favorable rates or at all could cause us to reduce the level of our underwriting commitments, to take more risk, or to incur higher costs. These developments could materially adversely affect our results of operations and financial condition.

 

We have sold businesses through reinsurance that could again become our direct financial and administrative responsibility if the purchasing companies were to become insolvent.

 

In the past, we have sold, and in the future we may sell, businesses through reinsurance ceded to third parties. For example, in 2001 we sold the insurance operations of our Fortis Financial Group (“FFG”) division to

 

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The Hartford Financial Services Group, Inc. (“The Hartford”) and in 2000 we sold our Long Term Care (“LTC”) division to John Hancock Life Insurance Company (“John Hancock”), now a subsidiary of Manulife Financial Corporation. Most of the assets backing reserves coinsured under these sales are held in trusts or separate accounts. However, if the reinsurers became insolvent, we would be exposed to the risk that the assets in the trusts and/or the separate accounts would be insufficient to support the liabilities that would revert to us.

 

The A.M. Best ratings of The Hartford and John Hancock are currently A and A+, respectively. A.M. Best currently maintains a stable outlook on both The Hartford’s and John Hancock’s financial strength ratings.

 

We also face the risk of again becoming responsible for administering these businesses in the event of reinsurer insolvency. We do not currently have the administrative systems and capabilities to process these businesses. Accordingly, we would need to obtain those capabilities in the event of an insolvency of one or more of the reinsurers. We might be forced to obtain such capabilities on unfavorable terms with a resulting material adverse effect on our results of operations and financial condition.

 

For more information on these arrangements, including the reinsurance recoverables and risk mitigation mechanisms used, please see “Item 7A—Quantitative and Qualitative Disclosures About Market Risks—Credit Risk.”

 

Due to the structure of our commission program, we are exposed to risks related to the creditworthiness and reporting systems of some of our agents, third party administrators and clients in Assurant Solutions and Assurant Specialty Property.

 

We are subject to the credit risk of some of the clients and/or agents with which we contract in Assurant Solutions and Assurant Specialty Property. For example, we advance agents’ commissions as part of our preneed insurance product offerings. These advances are a percentage of the total face amount of coverage. There is a one-year payback provision against the agency if death or lapse occurs within the first policy year. If SCI, which receives the largest shares of such agent commissions, were unable to fulfill its payback obligations, this could have an adverse effect on our operations and financial condition.

 

In addition, some of our clients, third party administrators and agents collect and report premiums or pay claims on our behalf. These parties’ failure to remit all premiums collected or to pay claims on our behalf on a timely and accurate basis could have an adverse effect on our results of operations.

 

We face significant competitive pressures in our businesses, which could reduce our profitability.

 

We compete for customers and distributors with many insurance companies and other financial services companies for business and individual customers, employer and other group customers, agents, brokers and other distribution relationships. Some of our competitors may offer a broader array of products than our subsidiaries or have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower costs, greater financial strength, more resources, or higher ratings.

 

Many of our insurance products, particularly our group benefits and group health insurance policies, are underwritten annually. There is a risk that group purchasers may be able to obtain more favorable terms from competitors, rather than renewing coverage with us. Competition may, as a result, adversely affect the persistency of our policies, as well as our ability to sell products.

 

Some of our competitors may have a lower target for returns on capital allocated to their business than we do, which may enable them to undercut our prices. In addition, in certain markets, we compete with organizations that have a substantial market share. In particular, certain large competitors of Assurant Health may be able to obtain favorable financial arrangements from health care providers that are unavailable to us, putting us at a competitive disadvantage and potentially adversely affecting our revenues and profits.

 

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In addition, as financial institutions gain experience with debt protection administration, their reliance on third party administrators, such as Assurant Solutions may diminish, thereby reducing our revenues and profits.

 

New competition could also cause the supply of insurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. Although there are some impediments facing potential competitors who wish to enter the markets we serve, the entry of new competitors into our markets can occur, affording our customers significant flexibility in moving to other insurance providers.

 

We may be unable to grow our business as we would like if we cannot find suitable acquisition candidates at attractive prices or integrate them effectively.

 

Historically, acquisitions and new ventures have played a significant role in the growth of some of our businesses. We may not be able to identify suitable acquisition candidates or new venture opportunities, to finance or complete such transactions on acceptable terms, or to integrate acquired businesses successfully.

 

Acquisitions entail a number of risks including, among other things, inaccurate assessment of liabilities; difficulties in realizing projected efficiencies, synergies and cost savings; difficulties in integrating systems and personnel; failure to achieve anticipated revenues, earnings or cash flow; an increase in our indebtedness; and a limitation in our ability to access additional capital when needed. Our failure to adequately address these acquisition risks could materially adversely affect our results of operations and financial condition.

 

The inability of our subsidiaries to pay sufficient dividends to us could prevent us from meeting our obligations and paying future stockholder dividends.

 

As a holding company whose principal assets are the capital stock of our subsidiaries, we rely primarily on dividends and other statutorily permissible payments from our subsidiaries to meet our obligations for payment of interest and principal on outstanding debt obligations and to pay dividends to stockholders and corporate expenses. The ability of our subsidiaries to pay dividends and to make such other payments in the future will depend on their statutory surplus, future statutory earnings and regulatory restrictions. Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of the subsidiaries’ creditors, including policyholders, have priority over creditors’ claims with respect to the assets and earnings of the subsidiaries. If any of our subsidiaries should become insolvent, liquidate or otherwise reorganize, our creditors and stockholders will have no right to proceed against their assets or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws. The applicable insurance laws of the jurisdiction where each of our insurance subsidiaries is domiciled would govern any proceedings relating to that subsidiary, and the insurance authority of that jurisdiction would act as a liquidator or rehabilitator for the subsidiary. Both creditors and policyholders of the subsidiary would be entitled to payment in full from the subsidiary’s assets before we, as a stockholder, would be entitled to receive any distribution from the subsidiary.

 

The payment of dividends by any of our regulated insurance company subsidiaries in excess of specified amounts (i.e., extraordinary dividends) must be approved by the subsidiary’s domiciliary state department of insurance. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by state. The formula for the majority of the states in which our subsidiaries are domiciled is based on the prior year’s statutory net income or 10% of the statutory surplus as of the end of the prior year. Some states limit ordinary dividends to the greater of these two amounts, others limit them to the lesser of these two amounts and some states exclude prior year realized capital gains from prior year net income in determining ordinary dividend capacity. Some states have an additional stipulation that dividends may only be paid out of earned surplus. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance subsidiaries to us (such as payments under a tax sharing agreement or payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Future regulatory actions could

 

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further restrict the ability of our insurance subsidiaries to pay dividends. For more information on the maximum amount our subsidiaries could pay us in 2012 without regulatory approval, see “Item 5—Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy.”

 

Our credit facilities also contain limitations on our ability to pay dividends to our stockholders if we are in default or such dividend payments would cause us to be in default of our obligations under the credit facilities.

 

Any additional material restrictions on the ability of insurance subsidiaries to pay dividends could adversely affect our ability to pay any dividends on our common stock and/or service our debt and pay our other corporate expenses.

 

The success of our business strategy depends on the continuing service of key executives and the members of our senior management team, and any failure to adequately provide for the succession of senior management and other key executives could have an adverse effect on our results of operations.

 

Our business and results of operations could be adversely affected if we fail to adequately plan for the succession of our senior management and other key executives. Although we have succession plans for key executives, this does not guarantee that they will stay with us.

 

Risks Related to Our Industry

 

Reform of the health insurance industry could make our health insurance business unprofitable.

 

In March 2010, President Obama signed the Affordable Care Act into law. Provisions of the Affordable Care Act and related reforms have and will continue to become effective at various dates over the next several years and will make sweeping and fundamental changes to the U.S. health care system that are expected to significantly affect the health insurance industry. For more information on the Affordable Care Act, please see Item 1, “Business—Regulation—Federal Regulation—Patient Protection and Affordable Care Act.”

 

The Affordable Care Act requires Assurant Health, for some products, to increase benefits, to limit rescission to cases of intentional fraud and, eventually, to insure pre-existing conditions in all lines of insurance, among other things. If, for those products, Assurant Health’s actual loss ratios fall short of required minimum loss ratios (by state and legal entity), we are required to rebate the difference to consumers.

 

For 2011, we estimated the full-year premium rebate accrual to be $41,589; however, further emerging regulations and interpretations from HHS as well as additional claims data for 2011 dates of service received through March 31, 2012 could cause the actual premium rebate to differ. We will not know the actual premium rebate amount with certainty until mid-2012; it will be based on actual premium and claim experience for all of 2011. The estimated liability may also need to be adjusted for any further regulatory clarifications or transition relief granted for states in which we do business. Please see “Item 7—Management’s Discussion & Analysis—Critical Accounting Estimates—Affordable Care Act” for more information.

 

We have made, and are continuing to make, significant changes to the operations and products of Assurant Health to adapt to the new environment. However, Assurant Health could be adversely affected if our plans for operating in the new environment are unsuccessful or if there is less demand than we expect for our products in the new environment.

 

We are subject to extensive laws and regulations, which increase our costs and could restrict the conduct of our business.

 

Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they do business. Such regulation is generally designed to protect the interests of policyholders. To that end, the

 

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laws of the various states and other jurisdictions establish insurance departments with broad powers over, among other things: licensing and authorizing the transaction of business; capital, surplus and dividends; underwriting limitations; companies’ ability to enter and exit markets; statutory accounting and other disclosure requirements; policy forms; coverage; companies’ ability to provide, terminate or cancel certain coverages; premium rates, including regulatory ability to disapprove or reduce the premium rates companies may charge; trade and claims practices; certain transactions between affiliates; content of disclosures to consumers; type, amount and valuation of investments; assessments or other surcharges for guaranty funds and companies’ ability to recover assessments through premium increases; and market conduct and sales practices.

 

For a discussion of various laws and regulations affecting our business, please see Item 1, “Business—Regulation.”

 

If regulatory requirements impede our ability to conduct certain operations, our results of operations and financial condition could be materially adversely affected. In addition, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations, or the relevant regulators’ interpretation of these laws and regulations. In such events, the insurance regulatory authorities could preclude or temporarily suspend us from operating, limit some or all of our activities, or fine us. These types of actions could materially adversely affect our results of operations and financial condition.

 

Our business is subject to risks related to litigation and regulatory actions.

 

From time to time, we may be subject to a variety of legal and regulatory actions relating to our current and past business operations, including, but not limited to:

 

   

disputes over coverage or claims adjudication including, but not limited to, pre-existing conditions in individual medical contracts and rescissions of policies;

 

   

disputes over our treatment of claims, where states or insured may allege that we failed to make required payments or to meet prescribed deadlines for adjudicating claims;

 

   

disputes regarding sales practices, disclosures, premium refunds, licensing, regulatory compliance, underwriting and compensation arrangements;

 

   

disputes with agents, brokers or network providers over compensation and termination of contracts and related claims;

 

   

actions by state regulatory authorities that may challenge our ability to increase or maintain our premium rates and/or require us to reduce current premium rates;

 

   

disputes alleging packaging of credit insurance products with other products provided by financial institutions;

 

   

disputes with tax and insurance authorities regarding our tax liabilities;

 

   

disputes relating to customers’ claims that the customer was not aware of the full cost or existence of the insurance or limitations on insurance coverage; and

 

   

industry-wide investigations regarding business practices including, but not limited to, the use and the marketing of certain types of insurance policies or certificates of insurance.

 

Because our business is heavily regulated at the state level, we are in constant communication with state regulators. For example, in the fall of 2011, Assurant, along with a number of other insurers, received a request for information from the New York Department of Financial Services (the “NYDFS”) regarding its lender-placed insurance business. More recently, on February 7, 2012, the Company and two of its wholly owned insurance subsidiaries, American Security Insurance Company and American Bankers Insurance Company of Florida, each

 

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received a subpoena from the NYDFS requesting information regarding the lender-placed business and related document retention practices. We cooperate with regulators to provide responses to all relevant requests in a timely manner.

 

Unfavorable outcomes in litigation or regulatory proceedings, or significant problems in our relationships with regulators, could materially adversely affect our results of operations and financial condition, our reputation, and our ability to continue to do business. They could also expose us to further investigations or litigations. In addition, certain of our clients in the mortgage industry are the subject of various regulatory investigations and/or litigation regarding mortgage lending practices, which could indirectly affect our business.

 

Changes in regulation may reduce our profitability and limit our growth.

 

Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are able to do business may significantly harm our business or results of operations in the future. For example, some states have imposed new time limits for the payment of uncontested covered claims and require health care and dental service plans to pay interest on uncontested claims not paid promptly within the required time period. Some states have also granted their insurance regulatory agencies additional authority to impose monetary penalties and other sanctions on health and dental plans engaging in certain unfair payment practices. If we were unable for any reason to comply with these requirements, it could result in substantial costs to us and may materially adversely affect our results of operations and financial condition.

 

In addition, new interpretations of existing laws, or new judicial decisions affecting the insurance industry, could adversely affect our business.

 

Legislative or regulatory changes that could significantly harm our subsidiaries and us include, but are not limited to:

 

   

imposed reductions on premium levels, limitations on the ability to raise premiums on existing policies, or new minimum loss ratios;

 

   

increases in minimum capital, reserves and other financial viability requirements;

 

   

enhanced or new regulatory requirements intended to prevent future financial crises or to otherwise ensure the stability of institutions;

 

   

new licensing requirements;

 

   

restrictions on the ability to offer certain types of insurance products;

 

   

prohibitions or limitations on provider financial incentives and provider risk-sharing arrangements;

 

   

more stringent standards of review for claims denials or coverage determinations;

 

   

guaranteed-issue requirements restricting our ability to limit or deny coverage;

 

   

new benefit mandates;

 

   

increased regulation relating to lender-placed insurance;

 

   

limitations on our ability to build appropriate provider networks and, as a result, manage health care and utilization due to “any willing provider” legislation, which requires us to take any provider willing to accept our reimbursement;

 

   

limitations on the ability to manage health care and utilization due to direct access laws that allow insureds to seek services directly from specialty medical providers without referral by a primary care provider;

 

   

new or enhanced regulatory requirements that require insurers to pay claims on terms other than those mandated by underlying policy contracts; and

 

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restriction of solicitation of insurance consumers by funeral board laws for prefunded funeral insurance coverage.

 

Recently, significant attention has been focused on the procedures that life insurers follow to identify unreported death claims. In November 2011, the National Conference of Insurance Legislators (“NCOIL”) proposed a model rule that would govern unclaimed property policies for insurers and mandate the use of the U.S. Social Security Administration’s Death Master File (the “Death Master File”) to identify deceased policyholders and beneficiaries. Certain state insurance regulators have also focused on this issue. For example, the New York Department of Insurance issued a letter requiring life insurers doing business in New York to use data from the Death Master File to search proactively for deceased policyholders and to pay claims without the receipt of a valid claim by or on behalf of a beneficiary. It is possible that regulators in other states may adopt regulations similar to the NCOIL model rule or to the requirements imposed by the New York Department of Insurance. The Company has evaluated the impact of the NCOIL model rule and established reserves for additional claim liabilities in certain of its businesses, including a $7,500 reserve increase in its preneed business for unreported claims. It is possible that existing reserves may be inadequate and need to be increased and/or that the Company may be required to establish reserves for businesses the Company does not currently believe are subject to the NCOIL model rule or any similar regulatory requirement.

 

Several proposals are currently pending to amend state insurance holding company laws to increase the scope of insurance holding company regulation. These include model laws proposed by the International Association of Insurance Supervisors and the NAIC that provide for uniform standards of insurer corporate governance, group-wide supervision of insurance holding companies, adjustments to risk-based capital ratios, and additional regulatory disclosure requirements for insurance holding companies. In addition, the NAIC has proposed a “Solvency Modernization Initiative” that focuses on capital requirements, corporate governance and risk management, statutory accounting and financial reporting, and reinsurance. Similarly, the Solvency II Directive, which was adopted in the European Union on November 25, 2009 and is expected to become effective in January 2014, reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards.

 

We cannot predict the effect of these or any other regulatory initiatives on the Company at this time, but it is possible that they could have a material adverse effect on the Company’s results of operations and financial condition.

 

The insurance and related businesses in which we operate may be subject to periodic negative publicity, which may negatively affect our financial results.

 

We communicate with and distribute our products and services ultimately to individual consumers. There may be a perception that some of these purchasers may be unsophisticated and in need of consumer protection. Accordingly, from time to time, consumer advocacy groups or the media may focus attention on our products and services, thereby subjecting us to negative publicity.

 

We may also be negatively affected if another company in one of our industries or in a related industry engages in practices resulting in increased public attention to our businesses. Negative publicity may also result from judicial inquiries, unfavorable outcomes in lawsuits, or regulatory or governmental action with respect to our products, services and industry commercial practices. Negative publicity may cause increased regulation and legislative scrutiny of industry practices as well as increased litigation or enforcement action by civil and criminal authorities. Additionally, negative publicity may increase our costs of doing business and adversely affect our profitability by impeding our ability to market our products and services, constraining our ability to price our products appropriately for the risks we are assuming, requiring us to change the products and services we offer, or increasing the regulatory burdens under which we operate.

 

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The insurance industry can be cyclical, which may affect our results.

 

Certain lines of insurance that we write can be cyclical. Although no two cycles are the same, insurance industry cycles have typically lasted for periods ranging from two to ten years. In addition, the upheaval in the global economy in recent years has been much more widespread and has affected all the businesses in which we operate. We expect to see continued cyclicality in some or all of our businesses in the future, which may have a material adverse effect on our results of operations and financial condition.

 

Risks Related to Our Common Stock

 

Given the recent economic climate, our stock may be subject to stock price and trading volume volatility. The price of our common stock could fluctuate or decline significantly and you could lose all or part of your investment.

 

In recent years, the stock markets have experienced significant price and trading volume volatility. Company-specific issues and market developments generally in the insurance industry and in the regulatory environment may have caused this volatility. Our stock price could materially fluctuate or decrease in response to a number of events and factors, including but not limited to: quarterly variations in operating results; operating and stock price performance of comparable companies; changes in our financial strength ratings; limitations on premium levels or the ability to maintain or raise premiums on existing policies; regulatory developments and negative publicity relating to us or our competitors. In addition, broad market and industry fluctuations may materially and adversely affect the trading price of our common stock, regardless of our actual operating performance.

 

Applicable laws, our certificate of incorporation and by-laws, and contract provisions may discourage takeovers and business combinations that some stockholders might consider to be in their best interests.

 

State laws and our certificate of incorporation and by-laws may delay, defer, prevent or render more difficult a takeover attempt that our stockholders might consider in their best interests. For example, Section 203 of the General Corporation Law of the State of Delaware may limit the ability of an “interested stockholder” to engage in business combinations with us. An interested stockholder is defined to include persons owning 15% or more of our outstanding voting stock. These provisions may also make it difficult for stockholders to replace or remove our directors, facilitating director enhancement that may delay, defer or prevent a change in control. Such provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.

 

Our certificate of incorporation or by-laws also contain provisions that permit our Board of Directors to issue one or more series of preferred stock, prohibit stockholders from filling vacancies on our Board of Directors, prohibit stockholders from calling special meetings of stockholders and from taking action by written consent, and impose advance notice requirements for stockholder proposals and nominations of directors to be considered at stockholder meetings.

 

Additionally, applicable state insurance laws may require prior approval of an application to acquire control of a domestic insurer. State statutes generally provide that control over a domestic insurer is presumed to exist when any person directly or indirectly owns, controls, has voting power over, or holds proxies representing, 10% or more of the domestic insurer’s voting securities. However, the State of Florida, in which some of our insurance subsidiaries are domiciled, sets this threshold at 5%. Because a person acquiring 5% or more of our common stock would indirectly control the same percentage of the stock of our Florida subsidiaries, the insurance change of control laws of Florida would apply to such transaction and at 10% the laws of many other states would likely apply to such a transaction. Prior to granting such approval, a state insurance commissioner will typically consider such factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the applicant’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control.

 

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We may also, under some circumstances involving a change of control, be obligated to repay our outstanding indebtedness under our revolving credit facility and other agreements. We or any possible acquirer may not have available financial resources necessary to repay such indebtedness in those circumstances, which may constitute an event of default resulting in acceleration of indebtedness and potential cross-default under other agreements. The threat of this could have the effect of delaying or preventing transactions involving a change of control, including transactions in which our stockholders would receive a substantial premium for their shares over then-current market prices, or which they otherwise may deem to be in their best interests.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

We own eight properties, including five buildings whose locations serve as headquarters for our operating segments, two buildings that serve as operation centers for Assurant Specialty Property and one building that serves as a claims training center for Assurant Specialty Property. Assurant Solutions and Assurant Specialty Property share headquarters buildings located in Miami, Florida and Atlanta, Georgia. Assurant Specialty Property has operations centers located in Florence, South Carolina and Springfield, Ohio. Assurant Solutions’ preneed business also has a headquarters building in Rapid City, South Dakota. Assurant Employee Benefits has a headquarters building in Kansas City, Missouri. Assurant Health has a headquarters building in Milwaukee, Wisconsin. We lease office space for various offices and service centers located throughout the U.S. and internationally, including our New York, New York corporate office and our data center in Woodbury, Minnesota. Our leases have terms ranging from month-to-month to twenty-five years. We believe that our owned and leased properties are adequate for our current business operations.

 

Item 3. Legal Proceedings

 

The Company is involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. See Note 25 to the Consolidated Financial Statements included elsewhere in this report for a description of certain matters. The Company may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that the outcome of pending matters will have a material adverse effect individually or in the aggregate, on the Company’s financial position, results of operations, or cash flows.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Stock Performance Graph

 

The following chart compares the total stockholder returns (stock price increase plus dividends paid) on our common stock from December 31, 2006 through December 31, 2011 with the total stockholder returns for the S&P 400 Midcap Index, as the broad equity market index, and the S&P 400 Multi-Line Insurance Index and S&P 500 Multi-Line Insurance Index, as the published industry indexes. The graph assumes that the value of the investment in the common stock and each index was $100 on December 31, 2006 and that all dividends were reinvested.

 

LOGO

 

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Total Values/Return to Stockholders

(Includes reinvestment of dividends)

 

     Base
Period
12/31/06
     INDEXED VALUES
Years Ending
 

Company / Index

      12/31/07     12/31/08     12/31/09      12/31/10      12/31/11  

Assurant, Inc.

     100         122.06        55.44        55.75         74.20         80.57   

S&P 400 MidCap Index

     100         107.98        68.86        94.60         119.80         117.72   

S&P 500 Multi-line Insurance Index*

     100         87.11        9.87        13.45         16.58         12.09   

S&P 400 Multi-line Insurance Index*

     100         90.33        64.07        74.02         86.73         94.17   
            ANNUAL RETURN PERCENTAGE
Years Ending
 

Company / Index

          12/31/07     12/31/08     12/31/09      12/31/10      12/31/11  

Assurant, Inc.

        22.06        (54.58 )     0.56         33.09         8.58   

S&P 400 MidCap Index

        7.98        (36.23 )     37.38         26.64         (1.73 )

S&P 500 Multi-line Insurance Index*

        (12.89 )     (88.67 )     36.35         23.23         (27.09 )

S&P 400 Multi-line Insurance Index*

        (9.67 )     (29.07 )     15.52         17.17         8.58   

 

* S&P 400 Multi-line Insurance Index is comprised of mid-cap companies, while the S&P 500 Multi-line Insurance Index is comprised of large-cap companies.

 

Common Stock Price

 

Our common stock is listed on the NYSE under the symbol “AIZ.” The following table sets forth the high and low intraday sales prices per share of our common stock as reported by the NYSE for the periods indicated.

 

Year Ended December 31, 2011

   High      Low      Dividends  

First Quarter

   $ 41.71       $ 37.83       $ 0.16   

Second Quarter

   $ 40.03       $ 34.48       $ 0.18   

Third Quarter

   $ 36.64       $ 31.23       $ 0.18   

Fourth Quarter

   $ 41.38       $ 34.07       $ 0.18   

Year Ended December 31, 2010

   High      Low      Dividends  

First Quarter

   $ 34.60       $ 29.08       $ 0.15   

Second Quarter

   $ 38.01       $ 32.47       $ 0.16   

Third Quarter

   $ 41.24       $ 33.95       $ 0.16   

Fourth Quarter

   $ 41.87       $ 33.43       $ 0.16   

 

Holders

 

On February 15, 2012, there were approximately 303 registered holders of record of our common stock. The closing price of our common stock on the NYSE on February 15, 2012 was $43.43.

 

Please see Item 12 of this report for information about our equity compensation plans.

 

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Shares Repurchased

 

Period in 2011

   Total Number
of Shares
Purchased
     Average Price
Paid Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced
Programs (1)
     Approximate
Dollar Value of
Shares that may yet
be Purchased
under the Programs
 

January 1 – January 31

     1,695,000       $ 38.76         1,695,000       $ 772,382   

February 1 – February 28

     1,097,940         40.27         1,097,940         728,194   

March 1 – March 31

     1,629,100         39.00         1,629,100         664,691   
  

 

 

    

 

 

    

 

 

    

Total first quarter

     4,422,040       $ 39.22         4,422,040         664,691   
  

 

 

    

 

 

    

 

 

    

April 1 – April 30

     1,469,000         38.21         1,469,000         608,587   

May 1 – May 31

     213,000         39.68         213,000         600,140   

June 1 – June 30

     1,302,000         35.16         1,302,000         554,385   
  

 

 

    

 

 

    

 

 

    

Total second quarter

     2,984,000       $ 36.99         2,984,000         554,385   
  

 

 

    

 

 

    

 

 

    

July 1 – July 31

     687,000         35.20         687,000         530,214   

August 1—August 31

     994,000         33.76         994,000         496,680   

September 1 – September 30

     527,500         35.04         527,500         478,205   
  

 

 

    

 

 

    

 

 

    

Total third quarter

     2,208,500       $ 34.51         2,208,500         478,205   
  

 

 

    

 

 

    

 

 

    

October 1 – October 31

     856,000         37.14         856,000         446,426   

November 1 – November 30

     1,545,000         37.85         1,545,000         387,977   

December 1 – December 31

     2,073,000         39.86         2,073,000         305,392   
  

 

 

    

 

 

    

 

 

    

Total fourth quarter

     4,474,000       $ 38.65         4,474,000         305,392   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total through December 31

     14,088,540       $ 37.83         14,088,540       $ 305,392   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Shares purchased pursuant to the November 10, 2006 publicly announced share repurchase authorization of up to $600,000 of outstanding common stock, which was increased by authorizations on January 22, 2010 and January 18, 2011, each authorizing the repurchase of up to an additional $600,000 of outstanding common stock.

 

Dividend Policy

 

On January 13, 2012, our Board of Directors declared a quarterly dividend of $0.18 per common share payable on March 12, 2012 to stockholders of record as of February 27, 2012. We paid dividends of $0.18 on December 12, 2011, September 13, 2011 and June 7, 2011 and $0.16 per common share on March 14, 2011. We paid dividends of $0.16 on December 13, 2010, September 14, 2010 and June 8, 2010 and $0.15 per common share on March 8, 2010. Any determination to pay future dividends will be at the discretion of our Board of Directors and will be dependent upon: our subsidiaries’ ability to make dividend and/or other statutorily permissible payments to us; our results of operations and cash flows; our financial position and capital requirements; general business conditions; legal, tax, regulatory and contractual restrictions on the payment of dividends; and other factors our Board of Directors deems relevant.

 

We are a holding company and, therefore, our ability to pay dividends, service our debt and meet our other obligations depends primarily on the ability of our regulated U.S. domiciled insurance subsidiaries to pay dividends and make other statutorily permissible payments to us. Our insurance subsidiaries are subject to significant regulatory and contractual restrictions limiting their ability to declare and pay dividends. See “Item 1A—Risk Factors—Risks Relating to Our Company—The inability of our subsidiaries to pay sufficient dividends to us could prevent us from meeting our obligations and paying future stockholder dividends.” For the calendar year 2012, the maximum amount of dividends that our regulated U.S. domiciled insurance subsidiaries could pay to us under applicable laws and regulations without prior regulatory approval is approximately $504,000. Dividends or returns of capital paid by our subsidiaries, net of infusions, totaled $523,881 in 2011.

 

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We may seek approval of regulators to pay dividends in excess of any amounts that would be permitted without such approval. However, there can be no assurance that we would obtain such approval if sought.

 

Payments of dividends on shares of common stock are subject to the preferential rights of preferred stock that our Board of Directors may create from time to time. There is no preferred stock issued and outstanding as of December 31, 2011. For more information regarding restrictions on the payment of dividends by us and our insurance subsidiaries, including pursuant to the terms of our revolving credit facilities, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

In addition, our $350,000 revolving credit facility restricts payments of dividends if an event of default under the facility has occurred or a proposed dividend payment would cause an event of default under the facility.

 

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Item 6. Selected Financial Data

 

Assurant, Inc.

Five-Year Summary of Selected Financial Data

 

    As of and for the years ended December 31,  
    2011      2010      2009     2008     2007  

Consolidated Statement of Operations Data:

           

Revenues

           

Net earned premiums and other considerations

  $ 7,125,368       $ 7,403,039       $ 7,550,335      $ 7,925,348      $ 7,407,730   

Net investment income

    689,532         703,190         698,838        774,347        799,073   

Net realized gains (losses) on investments (1)

    32,580         48,403         (53,597     (428,679     (62,220

Amortization of deferred gain on disposal of businesses

    20,461         10,406         22,461        29,412        33,139   

Fees and other income

    404,863         362,684         482,464        300,800        275,793   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

    8,272,804         8,527,722         8,700,501        8,601,228        8,453,515   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits (2)

    3,755,209         3,640,978         3,867,982        4,019,147        3,712,711   

Amortization of deferred acquisition costs and value of businesses acquired

    1,448,575         1,521,238         1,601,880        1,671,680        1,429,735   

Underwriting, general and administrative expenses

    2,293,705         2,392,035         2,377,364        2,286,170        2,238,851   

Interest expense

    60,360         60,646         60,669        60,953        61,178   

Goodwill impairment (3)

    —           306,381         83,000        —          —     
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

    7,557,849         7,921,278         7,990,895        8,037,950        7,442,475   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    714,955         606,444         709,606        563,278        1,011,040   

Provision for income taxes (4)

    169,116         327,267         279,032        115,482        357,294   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

  $ 545,839       $ 279,177       $ 430,574      $ 447,796      $ 653,746   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share :

           

Basic

           

Net income

  $ 5.65       $ 2.52       $ 3.65      $ 3.79      $ 5.45   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

           

Net income

  $ 5.58       $ 2.50       $ 3.63      $ 3.76      $ 5.38   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Dividends per share

  $ 0.70       $ 0.63       $ 0.59      $ 0.54      $ 0.46   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Share data:

           

Weighted average shares outstanding used in basic per share calculations

    96,626,306         110,632,551         118,036,632        118,005,967        119,934,873   

Plus: Dilutive securities

    1,169,003         840,663         459,008        968,712        1,624,694   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares used in diluted per share calculations

    97,795,309         111,473,214         118,495,640        118,974,679        121,559,567   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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    As of and for the years ended December 31,  
    2011      2010      2009      2008      2007  

Selected Consolidated Balance Sheet Data:

             

Cash and cash equivalents and investments

  $ 15,192,878       $ 14,670,364       $ 14,476,384       $ 13,107,476       $ 14,552,115   

Total assets

  $ 27,115,445       $ 26,397,018       $ 25,860,667       $ 24,514,586       $ 26,750,316   

Policy liabilities (5)

  $ 17,188,479       $ 16,520,321       $ 15,869,524       $ 15,806,235       $ 15,903,289   

Debt

  $ 972,278       $ 972,164       $ 972,058       $ 971,957       $ 971,863   

Mandatorily redeemable preferred stock

  $ —         $ 5,000       $ 8,160       $ 11,160       $ 21,160   

Total stockholders’ equity

  $ 5,026,936       $ 4,780,537       $ 4,853,249       $ 3,709,505       $ 4,088,903   

Per share data:

             

Total book value per share (6)

  $ 56.01       $ 46.31       $ 41.27       $ 31.53       $ 34.65   

 

(1) Included in net realized gains (losses) are other-than-temporary impairments of $7,836, $11,167, $38,660, $340,153 and $48,184 for 2011, 2010, 2009, 2008 and 2007, respectively.
(2) During 2011, we incurred losses of $157,645 associated with hurricane Irene, Tropical Storm Irene, wildfires in Texas and severe storms, including tornados in the southeast. During 2008, we incurred losses of $132,615 associated with hurricanes Gustav and Ike.
(3) Following the completion of our annual goodwill impairment analysis, we recorded an impairment charge of $306,381 related to Assurant Employee Benefits and Assurant Health and a charge of $83,000 related to Assurant Employee Benefits during the fourth quarters of 2010 and 2009, respectively. The impairment charges resulted in a decrease to net income but did not have any related tax benefit.
(4) During 2011, we had an $80,000 release of a capital loss valuation allowance related to deferred tax assets. During 2008, we recorded a $84,864 tax benefit due to the sale of a non-operating subsidiary and the related deferred tax assets on a capital loss carryover.
(5) Policy liabilities include future policy benefits and expenses, unearned premiums and claims and benefits payable.
(6) Total stockholders’ equity divided by the basic shares of common stock outstanding. At December 31, 2011, 2010 and 2009 there were 89,743,761, 103,227,238, and 117,591,250 shares, respectively, of common stock outstanding. At December 31, 2008 and 2007 there were 117,640,936 and 118,012,036 shares of common stock outstanding.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings “Item 1A—Risk Factors” and “Forward-Looking Statements.”

 

General

 

We report our results through five segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held, interest income from excess surplus of insurance subsidiaries not allocated to other segments, run-off Asbestos business, and additional costs associated with excess of loss reinsurance and ceded to certain subsidiaries in the London market between 1995 and 1997. The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and LTC, which were sold through reinsurance agreements as described below.

 

The following discussion covers the twelve months ended December 31, 2011 (“Twelve Months 2011”), twelve months ended December 31, 2010 (“Twelve Months 2010”) and twelve months ended December 31, 2009 (“Twelve Months 2009”). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

 

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Executive Summary

 

Net income increased $266,662 to $545,839 for Twelve Months 2011 from $279,177 for Twelve Months 2010. Twelve Months 2010 included a $306,381 non-cash goodwill impairment charge. Absent this charge, net income decreased $39,719 or 7%. The decline is primarily attributable to decreased net income in our Assurant Specialty Property segment mainly due to an increase in reportable catastrophe losses of $87,673 (after-tax) in Twelve Months 2011 and declines in net income at our Assurant Health and Assurant Employee Benefits segments. Partially offsetting these items was improved net income in our Assurant Solutions segment and an $80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011.

 

Assurant Solutions net income increased to $141,553 for Twelve Months 2011 from $103,206 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of $30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Consumer spending remains sluggish in the U.S. and economic uncertainty persists in Europe. However, revenues from our service contract offerings, including wireless, especially in Latin America, are expanding. Client contract renewals remain strong, driven by our ability to respond to evolving customer needs. Preneed sales increased in 2011 compared with 2010, primarily due to our strong relationship with SCI. Total net earned premiums and fees declined slightly in 2011 due to an approximate $160,000 reduction in premiums from the continued run-off of the domestic credit business and service contracts sold through former clients. Overall, modest premium growth is expected in 2012, even with the recent notification of an upcoming loss of a domestic wireless client. We continue to allocate resources to the wireless business due to its potential for growth and its intersection with our core capabilities.

 

Assurant Specialty Property net income decreased $119,222, to $305,065 for Twelve Months 2011 from $424,287 for Twelve Months 2010. The decline is primarily due to an increase in reportable catastrophe losses of $87,673 (after-tax) in Twelve Months 2011. There are fewer mortgage loans originating in the U.S. and foreclosures are projected to increase. Despite these trends, our alignment with market leaders, specifically specialty servicers, has allowed us to gain new portfolios, which have helped to offset a decline of loans in the overall marketplace. This was evident during the fourth quarter of 2011 as our clients gained new loan portfolios, mitigating the overall decrease in the number of tracked loans. We placed a significant portion of our reinsurance program in January 2012, including issuing a new catastrophe bond. The integration of the June 2011 SureDeposit acquisition has allowed us to expand our product offerings in the multi-family housing market. We expect net earned premiums and fees in 2012 to be consistent with 2011 amounts, reflecting growth in multi-family housing and a modest decline in lender-placed homeowners premiums. As our product mix changes, we anticipate our expense and non-catastrophe loss ratios will rise. Overall results are subject to catastrophe losses, changes in placement rates for lender-placed policies, and mortgage loan origination volume.

 

Assurant Health net income decreased to $40,886 for Twelve Months 2011 from $54,029 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of $27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Our 2011 operating costs dropped significantly due to organizational and operational expense initiatives that will better position us to succeed under health care reform. We have redesigned many of our products in response to health care reform. Sales of lower cost products, offering more limited benefits than traditional major medical insurance, grew in 2011 and we expect that trend to continue in 2012. Our new relationship with Aetna Signature Administrators® broadens the network of health care providers to which our major medical customers have access and improves affordability of those products, while improving engagement with our distributers. We expect this new relationship to improve our major medical sales. Beginning in 2012, any favorable loss development relative to 2011 reserves will increase the MLR rebate liability instead of flowing into earnings as was the case in 2011.

 

Assurant Employee Benefits net income decreased to $43,113 for Twelve Months 2011 from $63,538 for Twelve Months 2010. Lower results were primarily attributable to less favorable disability and life insurance loss

 

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experience, partially offset by improved dental insurance experience. During the fourth quarter of 2011 our disability incidence rates increased compared with prior years. We expect continued growth in net earned premiums of our voluntary and supplemental products. However, overall growth in our Assurant Employee Benefits business will be challenging in the near term, due to the loss of two DRMS clients and the lack of small employers’ payroll growth. Our strategic focus on distribution through key brokers and our expanded offerings continue to improve sales of voluntary, or employee-paid products. In addition, savings from expense initiatives are being redeployed to targeted growth initiatives.

 

Critical Factors Affecting Results

 

Our results depend on the appropriateness of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Factors affecting these items, including unemployment, difficult conditions in financial markets and the global economy, may have a material adverse effect on our results of operations or financial condition. For more information on these factors, see “Item 1A—Risk Factors.”

 

Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months including the ability to pay interest on our Senior Notes and dividends on our common stock.

 

For the twelve months ended December 31, 2011, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $849,633; net cash used in investing activities totaled $196,588 and net cash used in financing activities totaled $636,848. We had $1,166,713 in cash and cash equivalents as of December 31, 2011. Please see “—Liquidity and Capital Resources,” below for further details.

 

Revenues

 

We generate revenues primarily from the sale of our insurance policies and service contracts and from investment income earned on our investments. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income.

 

Under the universal life insurance guidance, income earned on preneed life insurance policies sold after January 1, 2009 are presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies sold prior to January 1, 2009 is presented separately as net earned premiums, with policyholder benefits expense being shown separately.

 

Our premium and fee income is supplemented by income earned from our investment portfolio. We recognize revenue from interest payments, dividends and sales of investments. Currently, our investment portfolio is primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates.

 

Interest rate volatility can increase or reduce unrealized gains or losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, fixed maturity and short-term investments.

 

The fair market value of the fixed maturity securities in our investment portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates. We also have investments that carry pre-payment risk, such as mortgage-backed and asset-backed securities. Interest rate fluctuations may cause actual net investment income and/or cash flows from such investments to differ from estimates made at the time of investment. In periods of declining interest rates,

 

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mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Therefore, in these circumstances we may be required to reinvest those funds in lower-interest earning investments.

 

Expenses

 

Our expenses are primarily policyholder benefits, selling, underwriting and general expenses and interest expense.

 

Policyholder benefits are affected by our claims management programs, reinsurance coverage, contractual terms and conditions, regulatory requirements, economic conditions, and numerous other factors. Benefits paid could substantially exceed our expectations, causing a material adverse effect on our business, results of operations and financial condition.

 

Selling, underwriting and general expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred costs, general operating expenses and income taxes.

 

We incur interest expenses related to our debt and mandatorily redeemable preferred stock, if any.

 

Critical Accounting Estimates

 

Certain items in our consolidated financial statements are based on estimates and judgment. Differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements.

 

The following critical accounting policies require significant estimates. The actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements.

 

Affordable Care Act

 

The Affordable Care Act was signed into law in March 2010. One provision of the Affordable Care Act, effective January 1, 2011, established a MLR to ensure that a minimum percentage of premiums is paid for clinical services or health care quality improvement activities. 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 HHS, are less than the required MLR, premium rebates are payable to the policyholders by August 1 of the subsequent year.

 

The Assurant Health loss ratio reported on page 63 (the “GAAP loss ratio”) differs from the loss ratio calculated under the MLR rules (“MLR loss ratio”) specified under the Affordable Care Act. The most significant differences include: the MLR loss ratio is calculated separately by state and legal entity; the MLR loss ratio calculation includes credibility adjustments for each entity, which are not applicable to the GAAP loss ratio; the MLR loss ratio calculation applies only to some of our health insurance products, while the GAAP loss ratio applies to the entire portfolio, including products not governed by the Affordable Care Act; the MLR loss ratio includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR loss ratio calculation; and the premium rebate amounts are considered adjustments to premiums for GAAP reporting whereas they are reported as additions to incurred claims in the MLR rebate estimate calculations.

 

Assurant Health has estimated the 2011 impact of this regulation and recorded a premium rebate accrual of $41,589 for Twelve Months 2011. The premium rebate accrual was based on our interpretation of definitions and calculation methodologies outlined in the HHS Interim Final Regulation released December 1, 2010, Technical Corrections released December 29, 2010 and the HHS Final Regulation released December 7, 2011. Additionally, the premium rebate accrual was based on separate projection models for the individual medical and

 

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small group businesses using projections of expected premiums, claims, and enrollment by state, legal entity, and market for medical business subject to MLR requirements for the MLR reporting year. In addition, the projection models include quality improvement expenses, state assessments and taxes.

 

We estimated the 2011 full-year premium rebate accrual to be $41,589; however, further emerging regulations and interpretations from HHS as well as additional loss experience on claims incurred in 2011 could cause the actual premium rebate to differ. We will not know the actual premium rebate amount with certainty until mid-2012; it will be based on actual premium and claim experience for all of 2011. The estimated liability may also need to be adjusted for any further regulatory clarifications or transition relief granted for states in which we do business. The premium rebate is presented as a reduction of net earned premiums in the consolidated statement of operations and included in unearned premiums in the consolidated balance sheets.

 

Reserves

 

Reserves are established in accordance with GAAP using generally accepted actuarial methods and reflect judgments about expected future claim payments. Calculations incorporate assumptions about inflation rates, the incidence of incurred claims, the extent to which all claims have been reported, future claims processing, lags and expenses and future investment earnings, and numerous other factors. While the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated, the calculation of reserves is not an exact process.

 

Reserves do not represent precise calculations of expected future claims, but instead represent our best estimates at a point in time of the ultimate costs of settlement and administration of a claim or group of claims, based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation.

 

Many of the factors affecting reserve adequacy are not directly quantifiable and not all future events can be anticipated when reserves are established. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of operations in the period in which such estimates are updated.

 

Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that ultimate losses will not exceed existing claim reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.

 

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The following table provides reserve information for our major product lines for the years ended December 31, 2011 and 2010:

 

    December 31, 2011     December 31, 2010  
    Future
Policy
Benefits and
Expenses
    Unearned
Premiums
    Claims and Benefits
Payable
    Future
Policy
Benefits and
Expenses
    Unearned
Premiums
    Claims and Benefits
Payable
 
        Case
Reserves
    Incurred
But Not
Reported
Reserves
        Case
Reserves
    Incurred
But Not
Reported
Reserves
 

Long Duration Contracts:

               

Preneed funeral life insurance policies and investment-type annuity contracts

  $ 3,996,162      $ 120,067      $ 11,342      $ 7,555      $ 3,862,431      $ 78,986      $ 12,009      $ 4,085   

Life insurance no longer offered

    456,860        626        1,428        4,487        467,574        649        1,577        265   

Universal life and other products no longer offered

    229,726        132        988        6,534        246,177        197        272        8,727   

FFG, LTC and other disposed businesses

    3,491,994        38,039        641,238        55,151        3,435,762        39,119        546,003        55,089   

Medical

    86,456        11,097        8,385        10,170        87,588        9,340        7,515        11,044   

All other

    8,145        249        16,708        6,928        5,621        324        18,465        5,115   

Short Duration Contracts:

               

Group term life

    —          4,277        211,910        37,797        —         4,550        209,514        36,486   

Group disability

    —          2,390        1,243,975        133,441        —         2,567        1,251,999        152,275   

Medical

    —          135,557        97,964        170,970        —         104,169        104,288        186,102   

Dental

    —          4,634        2,788        17,436        —         4,400        3,079        18,063   

Property and warranty

    —          2,041,190        199,829        370,814        —         1,887,759        168,952        349,479   

Credit life and disability

    —          286,631        50,645        59,949        —         307,430        61,808        69,644   

Extended service contracts

    —          2,498,403        2,425        37,398        —         2,363,836        2,855        40,373   

All other

    —          338,725        9,874        18,990        —         260,673        8,211        17,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 8,269,343      $ 5,482,017      $ 2,499,499      $ 937,620      $ 8,105,153      $ 5,063,999      $ 2,396,547      $ 954,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For a description of our reserving methodology, see Note 12 to the Consolidated Financial Statements included elsewhere in this report.

 

Long Duration Contracts

 

Reserves for future policy benefits represent the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions reflect best estimates for expected investment yield, inflation, mortality, morbidity, expenses and withdrawal rates. These assumptions are based on our experience to the extent it is credible, modified where appropriate to reflect current trends, industry experience and provisions for possible unfavorable deviation. We also record an unearned revenue reserve which represents premiums received which have not yet been recognized in our income statements.

 

Historically, premium deficiency testing has not resulted in a material adjustment to deferred acquisition costs or reserves except for discontinued products. Such adjustments could occur, however, if economic or mortality conditions significantly deteriorated.

 

Risks related to the reserves recorded for certain discontinued individual life, annuity, and long-term care insurance policies have been 100% ceded via reinsurance. While the Company has not been released from the contractual obligation to the policyholders, changes in and deviations from economic and mortality assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer.

 

Short Duration Contracts

 

Claims and benefits payable reserves for short duration contracts include (1) case reserves for known claims which are unpaid as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred

 

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but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.

 

Group Disability and Group Term Life

 

Case or claim reserves are set for active individual claims on group long term disability policies and for waiver of premium benefits on group term life policies. Reserve factors used to calculate these reserves reflect assumptions regarding disabled life mortality and claim recovery rates, claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves. Group long term disability and group term life waiver of premium reserves are discounted because the payment pattern and ultimate cost are fixed and determinable on an individual claim basis.

 

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

 

Key sensitivities at December 31, 2011 for group long term disability claim reserves include the discount rate and claim termination rates.

 

    Claims and
Benefits Payable
        Claims and
Benefits Payable
 

Group disability, discount rate decreased by 100 basis points

  $ 1,445,636     

Group disability, claim termination rate 10% lower

  $ 1,414,581   

Group disability, as reported

  $ 1,377,416      Group disability, as reported   $ 1,377,416   

Group disability, discount rate increased by 100 basis points

  $ 1,315,983     

Group disability, claim termination rate 10% higher

  $ 1,343,597   

 

The discount rate is also a key sensitivity for group term life waiver of premium reserves.

 

     Claims and Benefits Payable  

Group term life, discount rate decreased by 100 basis points

   $ 258,699   

Group term life, as reported

   $ 249,707   

Group term life, discount rate increased by 100 basis points

   $ 241,629   

 

Medical

 

IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for Medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method for recent claim periods. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate loss development factor. The projected claim method is used when development methods do not provide enough data to reliably estimate reserves and utilize expected ultimate loss ratios to calculate the required reserve. Where appropriate, we use variations on each method or a blend of the two.

 

Reserves for our various product lines are calculated using experience data where credible. If sufficient experience data is not available, data from other similar blocks may be used. Industry data provides additional benchmarks when historical experience is too limited. Reserve factors may also be adjusted to reflect considerations not reflected in historical experience, such as changes in claims inventory levels, changes in provider negotiated rates or cost savings initiatives, increasing or decreasing medical cost trends, product changes and demographic changes in the underlying insured population.

 

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Key sensitivities as of December 31, 2011 for medical reserves include claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix.

 

     Claims and Benefits Payable*  

Medical, loss development factors 1% lower

   $ 282,934   

Medical, as reported

   $ 268,934   

Medical, loss development factors 1% higher

   $ 255,934   

 

* This refers to loss development factors for the most recent four months. Our historical claims experience indicates that approximately 87% of medical claims are paid within four months of the incurred date.

 

Changes in medical loss development may increase or decrease the MLR rebate liability. For more information see Critical Accounting Estimates below.

 

Property and Warranty

 

Our Property and Warranty lines of business include lender-placed homeowners, manufactured housing homeowners, credit property, credit unemployment and warranty insurance and some longer-tail coverages (e.g. asbestos, environmental, other general liability and personal accident). Claim reserves for these lines are calculated on a product line basis using generally accepted actuarial principles and methods. They consist of case and IBNR reserves. The method we most often use in setting our Property and Warranty reserves is the loss development method. Under this method, we estimate ultimate losses for each accident period by multiplying the current cumulative losses by the appropriate loss development factor. We then calculate the reserve as the difference between the estimate of ultimate losses and the current case-incurred losses (paid losses plus case reserves). We select loss development factors based on a review of historical averages, adjusted to reflect recent trends and business-specific matters such as current claims payment practices.

 

The loss development method involves aggregating loss data (paid losses and case-incurred losses) by accident quarter (or accident year) and accident age for each product or product grouping. As the data ages, we compile loss development factors that measure emerging claim development patterns between reporting periods. By selecting the most appropriate loss development factors, we project the known losses to an ultimate incurred basis for each accident period.

 

The data is typically analyzed using quarterly paid losses and/or quarterly case-incurred losses. Some product groupings may also use annual paid loss and/or annual case-incurred losses, as well as other actuarially accepted methods.

 

Each of these data groupings produces an indication of the loss reserves for the product or product grouping. The process to select the best estimate differs by line of business. The single best estimate is determined based on many factors, including but not limited to:

 

   

the nature and extent of the underlying assumptions;

 

   

the quality and applicability of historical data—whether internal or industry data;

 

   

current and future market conditions—the economic environment will often impact the development of loss triangles;

 

   

the extent of data segmentation—data should be homogeneous yet credible enough for loss development methods to apply; and

 

   

the past variability of loss estimates—the loss estimates on some product lines will vary from actual loss experience more than others.

 

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Most of our credit property and credit unemployment insurance business is either reinsured or written on a retrospective commission basis. Business written on a retrospective commission basis permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years’ incurred claims is partially offset by a change in commission expense, which is included in the selling underwriting and general expenses line in our consolidated results of operations.

 

While management has used its best judgment in establishing its estimate of required reserves, different assumptions and variables could lead to significantly different reserve estimates. Two key measures of loss activity are loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.

 

If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be different than management’s estimate. The effect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2011 would be as follows:

 

Change in both loss frequency and

severity for all Property and Warranty

   Ultimate cost of claims
occurring in 2011
     Change in cost of claims
occurring in 2011
 

3% higher

   $ 605,395       $ 34,752   

2% higher

   $ 593,697       $ 23,054   

1% higher

   $ 582,113       $ 11,470   

Base scenario

   $ 570,643       $ —     

1% lower

   $ 559,173       $ (11,470

2% lower

   $ 547,589       $ (23,054

3% lower

   $ 535,891       $ (34,752

 

Reserving for Asbestos and Other Claims

 

Our property and warranty line of business includes exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1985. This exposure arose from a contract that we discontinued writing many years ago. We carry case reserves, as recommended by the various pool managers, and IBNR reserves totaling $39,579 (before reinsurance) and $32,229 (net of reinsurance) at December 31, 2011. We believe the balance of case and IBNR reserves for these liabilities are adequate. However, any estimation of these liabilities is subject to greater than normal variation and uncertainty due to the general lack of sufficiently detailed data, reporting delays and absence of a generally accepted actuarial methodology for those exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and what constitutes a claim. In addition, the determination of ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain. However, based on information currently available, and after consideration of the reserves reflected in the consolidated financial statements, we do not believe that changes in reserve estimates for these claims are likely to be material.

 

One of our subsidiaries, American Reliable Insurance Company (“ARIC”), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs have sought to void certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Some of the retrocessionaires have sought to avoid certain treaties with ARIC and the other reinsurers and some reinsureds have sought collection of disputed balances under some of the treaties. Disputes under these contracts generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers.

 

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Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation in an effort to resolve these disputes. The disputes involving ARIC and an affiliate, Assurant General Insurance Limited (formerly Bankers Insurance Company Limited (“AGIL”)), for the 1995 and 1996 program years are subject to working group settlements negotiated with other market participants. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes.

 

In the last five years, several settlements have been made relating to the 1995-1997 programs which have reduced ARIC’s liabilities significantly. Most notably, in 2010, the loss reserve balance decreased by $18,600 resulting from a $9,200 settlement relating to the 1997 program and settlements made to the 1995 and 1996 programs. In 2011, uncertainty continued to be resolved and the reserve balances were reduced by $3,870 accordingly. Carried case and IBNR reserves total $2,453 as of December 31, 2011. We believe, based on information currently available, that the amounts accrued are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it difficult to predict outcomes with certainty.

 

DAC

 

Deferred acquisition costs (“DAC”) represent expenses incurred in prior periods, primarily for the production of new business, that have been deferred for financial reporting purposes. Acquisition costs primarily consist of commissions, policy issuance expenses, premium tax and certain direct marketing expenses.

 

The DAC asset is tested annually to ensure that future premiums or gross profits are sufficient to support the amortization of the asset. Such testing involves the use of best estimate assumptions to determine if anticipated future policy premiums and investment income are adequate to cover all DAC and related claims, benefits and expenses. To the extent a deficiency exists, it is recognized immediately by a charge to the statement of operations and a corresponding reduction in the DAC asset. If the deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.

 

Long Duration Contracts

 

Acquisition costs for preneed life insurance policies issued prior to January 1, 2009 and certain discontinued life insurance policies have been deferred and amortized in proportion to anticipated premiums over the premium-paying period. These acquisition costs consist primarily of first year commissions paid to agents and sales and policy issue costs.

 

For preneed investment-type annuities, preneed life insurance policies with discretionary death benefit growth issued after January 1, 2009, universal life insurance policies and investment-type annuity contracts that are no longer offered, DAC is amortized in proportion to the present value of estimated gross profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities.

 

Acquisition costs relating to group worksite products, which typically have high front-end costs and are expected to remain in force for an extended period of time, consist primarily of first year commissions to brokers and costs of issuing new certificates. These acquisition costs are front-end loaded, thus they are deferred and amortized over the estimated terms of the underlying contracts.

 

Acquisition costs relating to individual voluntary limited benefit health policies issued in 2007 and later are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions payable under schedules that pay significantly higher rates in the first year.

 

Short Duration Contracts

 

Acquisition costs relating to property contracts, warranty and extended service contracts and single premium credit insurance contracts are amortized over the term of the contracts in relation to premiums earned.

 

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Acquisition costs relating to monthly pay credit insurance business consist mainly of direct marketing costs and are deferred and amortized over the estimated average terms and balances of the underlying contracts.

 

Acquisition costs relating to group term life, group disability, group dental and group vision consist primarily of compensation to sales representatives. These acquisition costs are front-end loaded; thus, they are deferred and amortized over the estimated terms of the underlying contracts.

 

Investments

 

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 for fixed maturity securities.

 

Any equity security whose price decline is deemed other-than-temporary is written down to its then 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 analyzes 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 its amortized cost and its net present value.

 

Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, 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. See also Note 4 to the Consolidated Financial Statements included elsewhere in this report and “Item 1A—Risk Factors—The value of our investments could decline, affecting our profitability and financial strength” and “Investments” contained later in this item.

 

Reinsurance

 

Reinsurance recoverables include amounts we are owed by reinsurers. Reinsurance costs are expensed over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in our consolidated balance sheets. An estimated allowance for doubtful accounts 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. The ceding of insurance does not discharge our primary liability to our insureds.

 

The following table sets forth our reinsurance recoverables as of the dates indicated:

 

     December 31, 2011      December 31, 2010  

Reinsurance recoverables

   $ 5,411,064       $ 4,997,316   

 

We have used reinsurance to exit certain businesses, including blocks of individual life, annuity, and long-term care business. The reinsurance recoverables relating to these dispositions amounted to $3,622,481 and $3,488,908 at December 31, 2011 and 2010, respectively.

 

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In the ordinary course of business, we are involved in both the assumption and cession of reinsurance with non-affiliated companies. The following table provides details of the reinsurance recoverables balance for the years ended December 31:

 

     2011      2010  

Ceded future policyholder benefits and expense

   $ 3,399,938       $ 3,344,066   

Ceded unearned premium

     1,013,778         796,944   

Ceded claims and benefits payable

     945,900         823,731   

Ceded paid losses

     51,448         32,575   
  

 

 

    

 

 

 

Total

   $ 5,411,064       $ 4,997,316   
  

 

 

    

 

 

 

 

We utilize reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions and Assurant Specialty Property, client risk and profit sharing. See also “Item 1A—Risk Factors—Reinsurance may not be available or adequate to protect us against losses and we are subject to the credit risk of insurers,” and “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk.”

 

Retirement and Other Employee Benefits

 

We sponsor qualified and non-qualified pension plans and a retirement health benefits plan covering our employees who meet specified eligibility requirements. The calculation of reported expense and liability associated with these plans requires an extensive use of assumptions including factors such as discount rates, expected long-term returns on plan assets, employee retirement and termination rates and future compensation increases. We determine these assumptions based upon currently available market and industry data, and historical performance of the plan and its assets. The assumptions we use may differ materially from actual results. See Note 21 to our consolidated financial statements for more information on our retirement and other employee benefits, including a sensitivity analysis for changes in the assumed health care cost trend rates.

 

Contingencies

 

We account for contingencies by evaluating each contingent matter separately. A loss is accrued if reasonably estimable and probable. We establish reserves for these contingencies at the best estimate, or, if no one estimated number within the range of possible losses is more probable than any other, we report an estimated reserve at the low end of the estimated range. Contingencies affecting the Company include litigation matters which are inherently difficult to evaluate and are subject to significant changes.

 

Deferred Taxes

 

Deferred income taxes are recorded for temporary differences between the financial reporting and income tax bases of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. A valuation allowance is established for deferred tax assets if, based on the weight of all available evidence, it is more likely than not that some portion of the asset will not be realized. The valuation allowance is sufficient to reduce the asset to the amount that is more likely than not to be realized. The Company has deferred tax assets resulting from temporary differences that may reduce taxable income in future periods. The detailed components of our deferred tax assets, liabilities and valuation allowance are included in Note 7 to our consolidated financial statements.

 

As of December 31, 2010, the Company had a cumulative valuation allowance of $90,738 against deferred tax assets. During the year ended December 31, 2011, the Company recognized a cumulative income tax benefit of $80,584 related to the release of a portion of the valuation allowance due to sufficient taxable income of the appropriate character during the period. The $80,584 consists of $80,000 related to capital losses and $584 related to operating losses. As of December 31, 2011, the Company has a cumulative valuation allowance of $10,154 against deferred tax assets, as it is management’s assessment that it is more likely than not that this amount of deferred tax assets will not be realized.

 

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The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carry back or carry forward period. U.S. tax rules mandate that capital losses can only be recovered against capital gains. An example of capital gains would be gains from the sale of investments. The Company’s capital loss carryovers were generated in 2008. The company was dependent upon having capital gain income within the next five years in order to use the capital loss carryforward in its entirety.

 

In determining whether the deferred tax asset is realizable, the Company weighed all available evidence, both positive and negative. We considered all sources of taxable income available to realize the asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry back years and tax-planning strategies.

 

The gross deferred tax asset related to net operating loss carryforwards on international subsidiaries is $52,674. Management believes that it is more likely than not that some of this asset will not be realized in the foreseeable future. Therefore, a cumulative valuation allowance of $9,472 has been recorded as of December 31, 2011. The Company is dependent on income of the same character in the same jurisdiction to support the deferred tax assets related to net operating loss carryforwards of international subsidiaries.

 

The Company believes it is more likely than not that the remainder of its deferred tax assets will be realized in the foreseeable future. Accordingly, other than noted herein for certain international subsidiaries, a valuation allowance has not been established.

 

Future reversal of the valuation allowance will be recognized either when the benefit is realized or when we determine that it is more likely than not that the benefit will be realized. Depending on the nature of the taxable income that results in a reversal of the valuation allowance, and on management’s judgment, the reversal will be recognized either through other comprehensive income (loss) or through continuing operations in the statement of operations. Likewise, if the Company determines that it is not more likely than not that it would be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be recorded through a charge to continuing operations in the statement of operations in the period such determination is made.

 

In determining the appropriate valuation allowance, management makes judgments about recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of expected future taxable income and available tax planning strategies. The assumptions used in making these judgments are updated periodically by management based on current business conditions that affect the Company and overall economic conditions. These management judgments are therefore subject to change based on factors that include, but are not limited to, changes in expected capital gain income in the foreseeable future and the ability of the Company to successfully execute its tax planning strategies. Please see “Item 1A—Risk Factors—Risks Related to Our Company—Unanticipated changes in tax provisions or exposure to additional income tax liabilities could materially and adversely affect our results for more information.

 

Valuation and Recoverability of Goodwill

 

Goodwill represented $639,097 and $619,779 of our $27,115,445 and $26,397,018 of total assets as of December 31, 2011 and 2010, respectively. We review our goodwill annually in the fourth quarter for impairment, or more frequently if indicators of impairment exist. Such indicators include, but are not limited to, a sustained significant decline in our market capitalization or a significant decline in our expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

 

We have concluded that our reporting units for goodwill testing are equivalent to our operating segments. Therefore, we test goodwill for impairment at the reporting unit level.

 

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The following table illustrates the amount of goodwill carried at each reporting unit:

 

     December 31,  
     2011      2010  

Assurant Solutions

   $ 379,645       $ 379,935   

Assurant Specialty Property

     259,452         239,844   

Assurant Health

     —           —     

Assurant Employee Benefits

     —           —     
  

 

 

    

 

 

 

Total

   $ 639,097       $ 619,779   
  

 

 

    

 

 

 

 

During 2011, the Company early adopted the amended intangibles- goodwill and other guidance and applied this guidance as part of its annual goodwill assessment. See Note 2—Recent Accounting Pronouncements—Adopted for further information. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, described below. In the fourth quarter of 2011, the Company chose the option to first perform a qualitative assessment for our Assurant Specialty Property reporting unit.

 

We initially considered the 2010 quantitative analysis performed by the Company whereby it compared the estimated fair value of the Assurant Specialty Property reporting unit with its net book value (“Step 1”). Based on the 2010 Step 1 test, Assurant Specialty Property had an estimated fair value that exceeded its net book value by 62.9%.

 

In undertaking our qualitative assessment, we considered macro-economic, industry and reporting unit-specific factors. These included (i.) the effect of the current interest rate environment on our cost of capital; (ii.) Assurant Specialty Property’s sustaining market share over the year; (iii.) lack of turnover in key management; (iv.) 2011 actual performance as compared to expected 2011 performance from our 2010 Step 1 assessment; and, (v.) the overall market position and share price of Assurant, Inc.

 

Based on our qualitative assessment, having considered the factors in totality we determined that it was not necessary to perform a Step 1 quantitative goodwill impairment test for Assurant Specialty Property and that it is more-likely-than-not that the fair value of Assurant Specialty Property continues to exceed its net book value at year-end 2011. Significant changes in the external environment or substantial declines in the operating performance of Assurant Specialty Property could cause us to reevaluate this conclusion in the future.

 

For Assurant Solutions, the Company did not elect the option to perform the qualitative assessment; rather it performed a Step 1 test. Under Step 1, if the estimated fair value of the reporting unit exceeds its net book value, goodwill is deemed not to be impaired, and no further testing is necessary. If the net book value exceeds its estimated fair value, we would then perform a second test to calculate the amount of impairment, if any. To determine the amount of any impairment, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would determine the fair value of all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical calculation that yields the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.

 

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Following the 2011 Step 1 test, the Company concluded that the estimated fair value of the Assurant Solutions reporting unit exceeded its net book value by 19.2%.

 

In cases where Step 1 testing was performed, the following describes the valuation methodologies used in 2011, 2010 and 2009 to derive the estimated fair value of the reporting units.

 

For each reporting unit, we identified a group of peer companies, which have operations that are as similar as possible to the reporting unit. Certain of our reporting units have a very limited number of peer companies. A Guideline Company Method is used to value the reporting unit based upon its relative performance to its peer companies, based on several measures, including price to trailing 12 month earnings, price to projected earnings, price to tangible net worth and return on equity.

 

A Dividend Discount Method (“DDM”) is used to value each reporting unit based upon the present value of expected cash flows available for distribution over future periods. Cash flows are estimated for a discrete projection period based on detailed assumptions, and a terminal value is calculated to reflect the value attributable to cash flows beyond the discrete period. Cash flows and the terminal value are then discounted using the reporting unit’s estimated cost of capital. The estimated fair value of the reporting unit equals the sum of the discounted cash flows and terminal value.

 

A Guideline Transaction Method values the reporting unit based on available data concerning the purchase prices paid in acquisitions of companies operating in the insurance industry. The application of certain financial multiples calculated from these transactions provides an indication of estimated fair value of the reporting units.

 

While all three valuation methodologies were considered in assessing fair value, the DDM was weighed more heavily since in the current economic environment, management believes that expected cash flows are the most important factor in the valuation of a business enterprise. In addition, recent dislocations in the economy, the scarcity of M&A transactions in the insurance marketplace and the relative lack of directly comparable companies, particularly for Assurant Solutions, make the other methods less credible.

 

Following the 2010 Step 1 test, the Company concluded that the net book values of the Assurant Employee Benefits and Assurant Health reporting units exceeded their estimated fair values. Based on the results of the Step 2 test which is used to determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination, the Company recorded impairment charges of $102,078 and $204,303 related to the Assurant Employee Benefits and Assurant Health reporting units, respectively, representing their entire goodwill asset balances. During 2009, the Company concluded that the net book value of the Assurant Employee Benefits reporting unit exceeded its estimated fair value and recorded an $83,000 impairment charge after performing a Step 2 test. See Note 6 and 11 for further information.

 

The two reporting units that passed the 2010 Step 1 test, Assurant Solutions and Assurant Specialty Property, had estimated fair values that exceeded their net book values by 1.9% and 62.9%, respectively. Assurant Solutions passed the 2010 Step 1 test by a slim margin mainly due to a significant increase in its net book value. The low interest rate environment in 2010 resulted in a significant increase in net unrealized gains in Assurant Solutions’ fixed income investments.

 

The determination of fair value of our reporting units requires many estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, earnings and required capital projections discussed above, discount rates, terminal growth rates, operating income and dividend forecasts for each reporting unit and the weighting assigned to the results of each of the three valuation methods described above. Changes in certain assumptions could have a significant impact on the goodwill impairment assessment. For example, an increase of the discount rate of 150 basis points, with all other assumptions held constant, for Assurant Solutions, would result in its estimated fair value being less than its net book value as of December 31, 2011. Likewise, a reduction of 250 basis points in the terminal growth rate, with all other assumptions held constant, for Assurant Solutions would result in its estimated fair value being less than its net book value as of December 31, 2011.

 

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We evaluated the significant assumptions used to determine the estimated fair values of Assurant Solutions, both individually and in the aggregate, and concluded they are reasonable. However, should the operating results of the unit decline substantially compared to projected results, or should further interest rate declines further increase the net unrealized investment portfolio gain position, we could determine that we need to record an impairment charge related to goodwill in Assurant Solutions.

 

Recent Accounting Pronouncements—Adopted

 

On December 31, 2011, the Company adopted the new guidance related to the presentation of comprehensive income. This guidance provides 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 new guidance eliminates the Company’s previously applied option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The guidance does not change the items that constitute net income or other comprehensive income, and does not change when an item of other comprehensive income must be reclassified to net income. The Company chose to early adopt this guidance and therefore is reporting comprehensive income in a separate but consecutive statement, with full retrospective application as required by the guidance. The adoption of the new presentation requirements did not have an impact on the Company’s financial position or results of operations.

 

On October 1, 2011, the Company adopted the amended intangibles- goodwill and other guidance. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amended guidance, 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 amended guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company chose to early adopt the revised standard and applied the amended guidance to its fourth quarter annual goodwill impairment test. The adoption of the amended guidance results in a change to the procedures for assessing goodwill impairment and did not have an impact on the Company’s financial position or results of operations. See Notes 2 and 10 for more information.

 

On January 1, 2011, the Company adopted the new 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.

 

On January 1, 2010, the Company adopted the guidance on transfers of financial assets. This guidance amended the derecognition guidance and eliminated the exemption from consolidation for qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

 

On January 1, 2010, the Company adopted the guidance on the accounting for a variable interest entity (“VIE”). This guidance amended the consolidation guidance applicable to VIEs to require a qualitative assessment in the determination of the primary beneficiary of the VIE, to require an ongoing reconsideration of the primary beneficiary, to amend the events that trigger a reassessment of whether an entity is a VIE and to change the consideration of kick-out rights in determining if an entity is a VIE. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.

 

On July 1, 2009, the Company adopted the guidance that established a single source of authoritative accounting and reporting guidance recognized by the Financial Accounting Standards Board (“FASB”) for

 

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nongovernmental entities (the “Codification”). The Codification did not change current GAAP, but was intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification is considered non-authoritative. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations. References to accounting guidance contained in the Company’s consolidated financial statements and disclosures have been updated to reflect terminology consistent with the Codification.

 

On April 1, 2009, the Company adopted the OTTI guidance. This guidance amended the previous guidance for debt securities and modified the presentation and disclosure requirements for debt and equity securities. In addition, it amended the requirement for an entity to positively assert the intent and ability to hold a debt security to recovery to determine whether an OTTI exists and replaced this provision with the assertion that an entity does not intend to sell or it is not more likely than not that the entity will be required to sell a security prior to recovery of its amortized cost basis. Additionally, this guidance modified the presentation of certain OTTI debt securities to only present the impairment loss within the results of operations that represents the credit loss associated with the OTTI with the remaining impairment loss being presented within other comprehensive income (loss) (“OCI”). At adoption, the Company recorded a cumulative effect adjustment to reclassify the non-credit component of previously recognized OTTI securities which resulted in an increase of $43,117 (after-tax) in retained earnings and a decrease of $43,117 (after-tax) in AOCI. See Note 4 for further information.

 

On January 1, 2009, the Company adopted the earnings per share guidance on participating securities and the two class method. The guidance requires unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents to be treated as participating securities. Therefore, the Company’s restricted stock and restricted stock units which have non-forfeitable rights to dividends are included in calculating basic and diluted earnings per share under the two-class method. All prior period earnings per share data presented have been adjusted retrospectively. The adoption of the new guidance did not have a material impact on the Company’s basic and diluted earnings per share calculations for the years ended December 31, 2009. See Note 23 for further information.

 

Recent Accounting Pronouncements—Not Yet Adopted

 

In July 2011, the FASB issued amendments to the other expenses guidance to address how health insurers should recognize and classify in their statements of operations 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 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 adoption of this amended guidance will not have an impact on the Company’s financial position and results of operations.

 

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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. The Company has chosen 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 stockholders’ equity between $140,000 and $150,000 in the year of adoption, 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. Due to our overall mix of business we do not currently expect the amendments to cause material changes to net income.

 

Results of Operations

 

Assurant Consolidated

 

Overview

 

The table below presents information regarding our consolidated results of operations:

 

     For the Years Ended December 31,  
     2011      2010      2009  

Revenues:

        

Net earned premiums and other considerations

   $ 7,125,368       $ 7,403,039       $ 7,550,335   

Net investment income

     689,532         703,190         698,838   

Net realized gains (losses) on investments

     32,580         48,403         (53,597 )

Amortization of deferred gains on disposal of businesses

     20,461         10,406         22,461   

Fees and other income

     404,863         362,684         482,464   
  

 

 

    

 

 

    

 

 

 

Total revenues

     8,272,804         8,527,722         8,700,501   
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses:

        

Policyholder benefits

     3,755,209         3,640,978         3,867,982   

Selling, underwriting and general expenses (1)

     3,742,280         3,913,273         3,979,244   

Interest expense

     60,360         60,646         60,669   
  

 

 

    

 

 

    

 

 

 

Total benefits, losses and expenses

     7,557,849         7,614,897         7,907,895   
  

 

 

    

 

 

    

 

 

 

Segment income before provision for income taxes and goodwill impairment

     714,955         912,825         792,606   

Provision for income taxes

     169,116         327,267         279,032   
  

 

 

    

 

 

    

 

 

 

Segment income before goodwill impairment

     545,839         585,558         513,574   

Goodwill impairment

     —           306,381         83,000   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 545,839       $ 279,177       $ 430,574   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes amortization of DAC and VOBA and underwriting, general and administrative expenses.

 

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Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net income increased $266,662, or 96%, to $545,839 for Twelve Months 2011 from $279,177 for Twelve Months 2010. Twelve Months 2010 included a $306,381 non-cash goodwill impairment charge. Absent this charge, net income decreased $39,719 or 7%. The decline is primarily attributable to decreased net income in our Assurant Specialty Property segment mainly due to an increase in reportable catastrophe losses of $87,673 (after-tax) in Twelve Months 2011 and declines in net income at our Assurant Health and Assurant Employee Benefits segments. Partially offsetting these items was improved net income in our Assurant Solutions segment and an $80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net income decreased $151,397, or 35%, to $279,177 for Twelve Months 2010 from $430,574 for Twelve Months 2009. Twelve Months 2010 includes $107,075 (after-tax) of improved segment results and $66,300 (after-tax) of increased realized gains on investments, compared with Twelve Months 2009. However, results decreased primarily due to a non-cash goodwill impairment charge of $306,381 in Twelve Months 2010 compared with an $83,000 non-cash goodwill impairment charge in Twelve Months 2009. In addition, Twelve Months 2009 includes an $83,542 (after-tax) favorable legal settlement.

 

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Assurant Solutions

 

Overview

 

The table below presents information regarding Assurant Solutions’ segment results of operations:

 

     For the Years Ended
December 31,
 
     2011     2010     2009  

Revenues:

      

Net earned premiums and other considerations

   $ 2,438,407      $ 2,484,299      $ 2,671,041   

Net investment income

     393,575        397,297        391,229   

Fees and other income

     265,204        228,052        216,550   
  

 

 

   

 

 

   

 

 

 

Total revenues

     3,097,186        3,109,648        3,278,820   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses:

      

Policyholder benefits

     852,729        889,387        1,029,151   

Selling, underwriting and general expenses (4)

     2,025,501        2,052,628        2,055,348   
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     2,878,230        2,942,015        3,084,499   
  

 

 

   

 

 

   

 

 

 

Segment income before provision for income taxes

     218,956        167,633        194,321   

Provision for income taxes

     77,403        64,427        74,269   
  

 

 

   

 

 

   

 

 

 

Segment net income

   $ 141,553      $ 103,206      $ 120,052   
  

 

 

   

 

 

   

 

 

 

Net earned premiums and other considerations:

      

Domestic:

      

Credit

   $ 173,287      $ 189,357      $ 241,293   

Service contracts

     1,198,510        1,291,725        1,411,953   

Other (1)

     53,219        49,017        84,939   
  

 

 

   

 

 

   

 

 

 

Total Domestic

     1,425,016        1,530,099        1,738,185   
  

 

 

   

 

 

   

 

 

 

International:

      

Credit

     391,124        346,475        320,462   

Service contracts

     495,853        459,166        415,694   

Other (1)

     24,692        18,001        15,731   
  

 

 

   

 

 

   

 

 

 

Total International

     911,669        823,642        751,887   
  

 

 

   

 

 

   

 

 

 

Preneed

     101,722        130,558        180,969   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,438,407      $ 2,484,299      $ 2,671,041   
  

 

 

   

 

 

   

 

 

 

Fees and other income:

      

Domestic:

      

Debt protection

   $ 29,501      $ 33,049      $ 40,058   

Service contracts

     120,896        110,386        102,410   

Other (1)

     4,123        8,839        18,534   
  

 

 

   

 

 

   

 

 

 

Total Domestic

     154,520        152,274        161,002   
  

 

 

   

 

 

   

 

 

 

International

     32,059        28,930        27,730   

Preneed

     78,625        46,848        27,818   
  

 

 

   

 

 

   

 

 

 

Total

   $ 265,204      $ 228,052      $ 216,550   
  

 

 

   

 

 

   

 

 

 

Gross written premiums (2):

      

Domestic:

      

Credit

   $ 399,564      $ 422,825      $ 526,532   

Service contracts

     1,470,605        1,193,423        1,012,670   

Other (1)

     86,503        65,732        92,111   
  

 

 

   

 

 

   

 

 

 

Total Domestic

     1,956,672        1,681,980        1,631,313   
  

 

 

   

 

 

   

 

 

 

International:

      

Credit

     1,013,486        968,878        843,225   

Service contracts

     622,674        523,382        462,964   

Other (1)

     45,312        22,407        26,567   
  

 

 

   

 

 

   

 

 

 

Total International

     1,681,472        1,514,667        1,332,756   
  

 

 

   

 

 

   

 

 

 

Total

   $ 3,638,144      $ 3,196,647      $ 2,964,069   
  

 

 

   

 

 

   

 

 

 

Preneed (face sales)

   $ 759,692      $ 734,884      $ 512,366   
  

 

 

   

 

 

   

 

 

 

Combined ratio (3):

      

Domestic

     97.4 %     100.5 %     97.2 %

International

     103.2 %     105.9 %     110.7 %

 

(1) This includes emerging products and run-off products lines.

 

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(2) Gross written premiums does not necessarily translate to an equal amount of subsequent net earned premiums since Assurant Solutions reinsures a portion of its premiums to insurance subsidiaries of its clients.
(3) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income excluding the preneed business.
(4) 2010 selling, underwriting and general expenses includes a $47,612 intangible asset impairment charge.

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Income

 

Segment net income increased $38,347, or 37%, to $141,553 for Twelve Months 2011 from $103,206 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of $30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Absent this item, net income increased $7,399, or 5%, as a result of improved underwriting experience across our international and domestic service contract businesses. Partially offsetting the improvement was a $4,875 (after-tax) increase to policyholder benefits for unreported claims in our preneed business during fourth quarter 2011 as well as continued reduced earnings from certain domestic blocks of business that are in run-off.

 

Total Revenues

 

Total revenues decreased $12,462, or less than 1%, to $3,097,186 for Twelve Months 2011 from $3,109,648 for Twelve Months 2010. The decrease was mainly the result of lower net earned premiums of $45,892, which is primarily attributable to the continued run-off of certain domestic service contract business from former clients that are no longer in business (mainly Circuit City) and the continued run-off of our domestic credit insurance business. Net earned premiums for full year 2011 declined approximately $160,000 from these two sources compared with 2010.

 

Partially offsetting these decreases were new domestic service contract business growth and increases in both our international credit and service contract businesses, which also benefited from the favorable impact of foreign exchange rates. Fees and other income increased $37,152 mainly as a result of increases in our preneed business.

 

Gross written premiums increased $441,497, or 14%, to $3,638,144 for Twelve Months 2011 from $3,196,647 for Twelve Months 2010. Gross written premiums from our domestic service contract business increased $277,182 primarily due to the 2010 addition of a large new client and an increase in automobile vehicle service contract sales. Our international service contract business increased $99,292 and our international credit business increased $44,608, primarily due to growth from new and existing clients, particularly in Latin America, and the favorable impact of foreign exchange rates. Partially offsetting these increases was a $23,261 decrease in our domestic credit insurance business, due to the continued run-off of this product line.

 

Preneed face sales increased $24,808, to $759,692 for Twelve Months 2011 from $734,884 for Twelve Months 2010. This increase was primarily attributable to domestic growth from our exclusive distribution partnership with SCI, the largest funeral provider in North America. This exclusive distribution partnership is effective through September 29, 2014. Twelve Months 2011 face sales also benefited from recent acquisitions made by SCI. This was partially offset by reduced sales in Canada compared to 2010, when consumer buying increased in advance of a consumer tax rate change that took effect July 1, 2010 in certain provinces.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $63,785, or 2%, to $2,878,230 for Twelve Months 2011 from $2,942,015 for Twelve Months 2010. Policyholder benefits decreased $36,658 primarily due to improved loss experience across our international and domestic service contract businesses and a decrease associated with certain domestic lines of business that are in run-off. Partially offsetting these items was a $7,500 increase to policyholder benefits for unreported claims related to the use of the U.S. Social Security Administration Death Master File to identify deceased policyholders and beneficiaries in our preneed business during fourth quarter 2011.

 

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Selling, underwriting and general expenses decreased $27,127. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased $6,430 due to higher earnings in our international business resulting from growth of the business coupled with the unfavorable impact of foreign exchange rates. This was partially offset by lower earnings in our domestic service contract business. General expenses decreased $33,557 primarily due to the above mentioned $47,612 intangible asset impairment charge and from expense management efforts in domestic lines of business that are in run-off. These decreases were partially offset by higher expenses associated with the growth of our international and domestic service contract businesses.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net Income

 

Segment net income decreased $16,846, or 14%, to $103,206 for Twelve Months 2010 from $120,052 for Twelve Months 2009 primarily due to an intangible asset impairment charge of $30,948 (after-tax) related to a fourth quarter 2010 client notification of non-renewal of a block of domestic service contract business effective June 1, 2011.

 

Absent this item, net income increased $14,102, or 12%, as a result of improved underwriting results in our international and preneed businesses. International results improved primarily due to favorable loss experience in our U.K. credit insurance business and growth in Latin America. These items were partially offset by decreased underwriting results primarily attributable to the run-off of certain lines of business, and a $6,048 (after-tax) change in the value of our consumer price index caps (derivative instruments that protect against inflation risk in our preneed products). Additionally, Twelve Months 2009 net income included a $10,800 (after-tax) restructuring charge.

 

Total Revenues

 

Total revenues decreased $169,172, or 5%, to $3,109,648 for Twelve Months 2010 from $3,278,820 for Twelve Months 2009. The decrease was the result of lower net earned premiums of $186,742, which was primarily attributable to the continued run-off of: certain domestic extended service contract business as earnings from former clients that are no longer in business; preneed policies sold before January 1, 2009; and domestic credit insurance business.

 

Partially offsetting these decreases was the addition of new domestic service contract business clients and growth in both our international credit and service contracts businesses, which also benefited from the favorable impact of foreign exchange rates. We expect net earned premiums in 2011 to decline $170,000 due to the run-off of domestic credit insurance business and former large extended services contract clients that are no longer in business.

 

Fees and other income improved as a result of increases in preneed business, partially offset by mark-to-market losses associated with our consumer price index caps. Net investment income primarily increased due to the favorable impact of foreign exchange rates.

 

Gross written premiums increased $232,578, or 8%, to $3,196,647 for Twelve Months 2010 from $2,964,069 for Twelve Months 2009. Gross written premiums from our domestic service contract business increased $180,753 due to the addition of new clients and an increase in automobile vehicle service contracts as automobile sales increased and from premiums reported by certain clients in a timelier manner than in the past. This had no effect on net earned premiums. In addition, consistent with our international expansion strategy, our international credit business increased $125,653 due to growth across several countries from both new and existing clients and from the favorable impact of foreign exchange rates. Gross written premiums from our international service contract business increased $60,418, primarily due to favorable foreign exchange rates and growth from existing clients, partially offset by lower premiums in Denmark due to our decision to exit that

 

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market in 2009. Gross written premiums from our domestic credit insurance business decreased $103,707, due to the continued runoff of this product line. Other domestic gross written premiums decreased $26,379 mainly due to a one-time campaign with Ford Motor Company conducted and completed in Second Quarter 2009.

 

Preneed face sales increased $222,518 primarily due to increased consumer buying in advance of a less favorable tax rate change in certain Canadian provinces, as well as growth from our exclusive distribution partnership with SCI the largest funeral provider in North America, and increased sales initiatives.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $142,484, or 5%, to $2,942,015 for Twelve Months 2010 from $3,084,499 for Twelve Months 2009. Policyholder benefits decreased $139,764 primarily due to improved loss experience in our U.K. credit business and in our domestic service contract business from existing and run-off clients, the run-off of preneed policies sold before January 1, 2009, and the continued run-off of our domestic credit business.

 

Selling, underwriting and general expenses decreased $2,720. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, decreased $42,585 as commission expense related to our domestic service contract business declined due to lower net earned premiums, partially offset by increased commission expense in our international business due to higher net earned premiums in that business coupled with the unfavorable impact of foreign exchange rates. General expenses increased $39,865 primarily due to the above-mentioned $47,612 (pre-tax) intangible asset impairment charge, the amortization of previously capitalized upfront client commission payments, as we continue to grow our international business and distribution channels, and the unfavorable impact of foreign exchange rates. Partially offsetting these increases was cost savings realized in Twelve Months 2010 as a result of a restructuring in Twelve Months 2009. This restructuring added $16,500 to expenses in Twelve Months 2009.

 

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Assurant Specialty Property

 

Overview

 

The table below presents information regarding Assurant Specialty Property’s segment results of operations:

 

     For the Years Ended December 31,  
     2011     2010     2009  

Revenues:

      

Net earned premiums and other considerations

   $ 1,904,638      $ 1,953,223      $ 1,947,529   

Net investment income

     103,259        107,092        110,337   

Fees and other income

     79,337        69,147        56,890   
  

 

 

   

 

 

   

 

 

 

Total revenues

     2,087,234        2,129,462        2,114,756   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses:

      

Policyholder benefits

     857,223        684,652        664,182   

Selling, underwriting and general expenses

     767,761        797,996        832,528   
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     1,624,984        1,482,648        1,496,710   
  

 

 

   

 

 

   

 

 

 

Segment income before provision for income tax

     462,250        646,814        618,046   

Provision for income taxes

     157,185        222,527        212,049   
  

 

 

   

 

 

   

 

 

 

Segment net income

   $ 305,065      $ 424,287      $ 405,997   
  

 

 

   

 

 

   

 

 

 

Net earned premiums and other considerations by major product groupings:

      

Homeowners (lender-placed and voluntary)

   $ 1,274,485      $ 1,342,791      $ 1,369,031   

Manufactured housing (lender-placed and voluntary)

     216,613        220,309        219,960   

Other (1)

     413,540        390,123        358,538   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,904,638      $ 1,953,223      $ 1,947,529   
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Loss ratio (2)

     45.0 %     35.1 %     34.1 %

Expense ratio (3)

     38.7 %     39.5 %     41.5 %

Combined ratio (4)

     81.9 %     73.3 %     74.7 %

 

(1) Primarily includes lender-placed flood, miscellaneous specialty property and multi-family housing insurance products.
(2) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
(4) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income.

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Income

 

Segment net income decreased $119,222, or 28%, to $305,065 for Twelve Months 2011 from $424,287 for Twelve Months 2010. The decline was primarily due to an increase in reportable catastrophe losses of $87,673 (after-tax) in Twelve Months 2011. Increased frequency of non-catastrophe weather related losses during Twelve Months 2011 compared with Twelve Months 2010 also contributed to the decline.

 

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Total Revenues

 

Total revenues decreased $42,228, or 2%, to $2,087,234 for Twelve Months 2011 from $2,129,462 for Twelve Months 2010. Growth in lender-placed homeowners and multi-family housing gross earned premiums was more than offset by increased ceded lender-placed homeowners’ premiums and $21,501 in increased catastrophe reinsurance premiums.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses increased $142,336, or 10%, to $1,624,984 for Twelve Months 2011 from $1,482,648 for Twelve Months 2010. The loss ratio increased 990 basis points with 710 basis points attributed to $134,881 of increased reportable catastrophe losses in Twelve Months 2011 compared to Twelve Months 2010. Reportable loss events for Twelve Months 2011 included Hurricane Irene, Tropical Storm Lee, wildfires in Texas and severe storms, including tornados in the southeast. The principal causes of loss for these events were wind and flood. Reportable loss events for Twelve Months 2010 included Arizona wind and hailstorms and Tennessee storms. Reportable catastrophe losses includes only individual catastrophic events that generated losses to the Company in excess of $5,000, pre-tax and net of reinsurance. Commissions, taxes, licenses, and fees decreased $37,021 primarily due to client contract changes which resulted in lower commission expense. General expenses increased $6,791 primarily due to increased employee benefit expenses and costs associated with the June 2011 SureDeposit acquisition including associated intangible asset amortization.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net Income

 

Segment net income increased $18,290, or 5%, to $424,287 for Twelve Months 2010 from $405,997 for Twelve Months 2009. The improvement is primarily due to an improved expense ratio as a result of lower commission expense due to increases in client-ceded premiums and operational improvements. Results for Twelve Months 2010 include $14,797 (after tax) of reportable catastrophe losses, including losses from Arizona wind and hailstorms in fourth quarter 2010 and Tennessee storms during second quarter 2010. There were no reportable catastrophes during Twelve Months 2009.

 

Total Revenues

 

Total revenues increased $14,706, or 1%, to $2,129,462 for Twelve Months 2010 from $2,114,756 for Twelve Months 2009. Growth in lender-placed homeowners, lender-placed flood and renters insurance products gross earned premiums and increased fee income were partially offset by increased ceded lender-placed homeowners’ premiums and lower real estate owned premiums.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $14,062, or 1%, to $1,482,648 for Twelve Months 2010 from $1,496,710 for Twelve Months 2009. The decrease was primarily due to lower selling, underwriting, and general expenses of $34,532 compared with Twelve Months 2009, partially offset by increased policyholder benefits of $20,470. The overall loss ratio increased 100 basis points primarily due to $22,764 of reportable catastrophes in Twelve Months 2010 and the non-recurrence of a $9,023 subrogation reimbursement in Twelve Months 2009. These items are partially offset by lower small-scale weather related losses. Commissions, taxes, licenses and fees decreased $37,676, primarily due to client contract changes that resulted in lower commission expenses and a release of a premium tax reserve. General expenses increased $3,144 primarily due to increased employee related expenses.

 

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Assurant Health

 

Overview

 

The table below presents information regarding Assurant Health’s segment results of operations:

 

     For the Years Ended December 31,  
     2011     2010     2009  

Revenues:

      

Net earned premiums and other considerations

   $ 1,718,300      $ 1,864,122      $ 1,879,628   

Net investment income

     45,911        48,540        47,658   

Fees and other income

     34,635        40,133        39,879   
  

 

 

   

 

 

   

 

 

 

Total revenues

     1,798,846        1,952,795        1,967,165   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses:

      

Policyholder benefits

     1,271,060        1,302,928        1,410,171   

Selling, underwriting and general expenses

     460,646        565,060        604,698   
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     1,731,706        1,867,988        2,014,869   
  

 

 

   

 

 

   

 

 

 

Segment income (loss) before provision for income tax

     67,140        84,807        (47,704

Provision (benefit) for income taxes

     26,254        30,778        (17,484
  

 

 

   

 

 

   

 

 

 

Segment net income (loss)

   $ 40,886      $ 54,029      $ (30,220
  

 

 

   

 

 

   

 

 

 

Net earned premiums and other considerations:

      

Individual Markets:

      

Individual markets

   $ 1,286,236      $ 1,375,005      $ 1,374,436   

Group markets

     473,653        489,117        505,192   
  

 

 

   

 

 

   

 

 

 

Total net earned premiums before premium rebates

     1,759,889        1,864,122        1,879,628   

Premium rebates (4)

     (41,589     —          —     
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,718,300      $ 1,864,122      $ 1,879,628   
  

 

 

   

 

 

   

 

 

 

Covered lives by product line (5):

      

Individual Markets:

      

Individual markets

     603        617        646   

Group markets

     129        144        121   
  

 

 

   

 

 

   

 

 

 

Total

     732        761        767   
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Loss ratio (1)

     74.0 %     69.9 %     75.0 %

Expense ratio (2)

     26.3 %     29.7 %     31.5 %

Combined ratio (3)

     98.8 %     98.1 %     105.0 %

 

(1) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
(3) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income.
(4) As of January 1, 2011, the Company began accruing premium rebates to comply with the minimum medical loss ratio requirements under the Affordable Care Act.
(5) As of January 1, 2011, covered lives consist of all policies, including supplemental coverages and self-funded group products, purchased by policyholders. Prior periods consisted only of medical policies.

 

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The Affordable Care Act

 

Some provisions of the Affordable Care Act took effect in 2011, and other provisions will become effective at various dates over the next several years. In December 2010, HHS issued a number of interim final regulations with respect to the Affordable Care Act. In December 2011, HHS issued final regulations regarding the MLR. HHS has also issued technical corrections and Q&As throughout 2010 and 2011. However, HHS has not issued guidance regarding specific components of the MLR calculations. The Company has discussed these issues with other industry experts in order to make reasonable assumptions regarding the MLR rebate calculations. However, there remains a risk that HHS will issue new guidance before the 2011 MLR rebate calculations are due to be filed with HHS on June 1, 2012. Management continues to modify its business model to adapt to these new regulations and will continue to monitor HHS and state regulatory activity for clarification and additional regulations. Given the sweeping nature of the changes represented by the Affordable Care Act, our results of operations and financial position could be materially adversely affected. For more information, see Item 1A, “Risk Factors—Risk related to our industry—Reform of the health insurance industry could make our health insurance business unprofitable.”

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Income

 

Segment net income decreased $13,143, or 24%, to $40,886 for Twelve Months 2011 from $54,029 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of $27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Twelve Months 2011 results include $12,900 (after-tax) of favorable reserve development relative to 2010 year-end reserves, a $4,780 (after-tax) reimbursement from a pharmacy services provider related to prior year activity, reduced expenses associated with organizational and operational expense initiatives, and lower commissions due to agent compensation changes and lower sales of new policies. Twelve Months 2010 results included restructuring charges of $8,721 (after-tax) and a $17,421 (after-tax) benefit from a reserve release related to a legal settlement.

 

Total Revenues

 

Total revenues decreased $153,949, or 8%, to $1,798,846 for Twelve Months 2011 from $1,952,795 for Twelve Months 2010. Net earned premiums and other considerations before premium rebates from our individual markets business decreased $88,769, or 6%, due to a decline in traditional individual medical product sales, caused by the transition to supplemental and affordable choice products and changes in agent commissions, resulting from the Affordable Care Act. These decreases were partially offset by premium rate increases and increased sales of supplemental and affordable choice products. Net earned premiums and other considerations before rebates from our small employer group business decreased $15,464, or 3%, due to lower sales and a continued high level of policy lapses, partially offset by premium rate increases. Twelve Months 2011 included a premium rebate accrual of $41,589 associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. There was no premium rebate accrual in Twelve Months 2010 as the MLR requirement was not yet in effect.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $136,282, or 7%, to $1,731,706 for Twelve Months 2011 from $1,867,988 for Twelve Months 2010. Policyholder benefits decreased $31,868, or 2%, however, the benefit loss ratio increased to 74.0% from 69.9%. The decrease in policyholder benefits was primarily attributable to favorable reserve development relative to 2010 year-end reserves, a decline in business volume, partially offset by a $26,802 benefit from a reserve release related to a legal settlement in Twelve Months 2010. The increase in the benefit loss ratio was primarily attributable to the inclusion of premium rebates in net earned premiums and other considerations, and a disproportionate decline in benefits in relation to the decrease in net earned premiums

 

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and other considerations. Selling, underwriting and general expenses decreased $104,414, or 18%, primarily due to reduced employee-related and advertising expenses and reduced commissions due to agent compensation changes and lower sales of new policies.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net Income (Loss)

 

Segment results increased $84,249, to net income of $54,029 for Twelve Months 2010 from a net loss of $(30,220) for Twelve Months 2009. The increase is primarily attributable to corrective pricing actions and plan design changes that began in late 2009. Twelve Months 2010 includes a $17,421 (after-tax) benefit from a reserve release related to a legal settlement, while Twelve Months 2009 included charges of $32,370 (after-tax) relating to unfavorable rulings in two claim-related lawsuits, a restructuring charge of $2,925 (after-tax) and H1NI-related medical charges of $2,535 (after-tax). Twelve Months 2010 results were also affected by favorable claim reserve development and reduced expenses associated with expense management initiatives, partially offset by restructuring charges of $8,721 (after-tax).

 

Total Revenues

 

Total revenues decreased $14,370, or less than 1%, to $1,952,795 for Twelve Months 2010 from $1,967,165 for Twelve Months 2009. Net earned premiums and other considerations from our individual medical business increased $18,983, or 1%, primarily due to premium rate increases. The effect of the premium rate increases was partially offset by declining members that is resulting from a continued high level of policy lapses and lower sales. Net earned premiums and other considerations from our small employer group business decreased $16,075, or 3%, due to a continued high level of policy lapses, partially offset by premium rate increases. Short-term medical net earned premiums and other considerations decreased $18,414, or 18%, due to a reduction in policies sold, partially offset by premium rate increases.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $146,881, or 7%, to $1,867,988 for Twelve Months 2010 from $2,014,869 for Twelve Months 2009. Policyholder benefits decreased $107,243, or 8%, and the benefit loss ratio decreased to 69.9% from 75.0%. The decrease was primarily due to a $26,802 benefit from a reserve release related to a legal settlement and favorable claim reserve development during Twelve Months 2010 compared to last year, partially offset by higher estimated claim experience in our small employer group business. Twelve Months 2009 also includes charges of $49,800 relating to unfavorable rulings in two claim-related lawsuits. Selling, underwriting and general expenses decreased $39,638, or 7%, primarily due to reduced employee-related and advertising expenses, lower amortization of deferred acquisition costs, and reduced commission expense due to lower sales of new policies. Twelve Months 2010 includes restructuring charges of $13,417 that were the result of expense management initiatives to help transition the business for the post-health care reform. Twelve Months 2009 also included a restructuring charge of $4,500.

 

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Assurant Employee Benefits

 

Overview

 

The table below presents information regarding Assurant Employee Benefits’ segment results of operations:

 

     For the Years Ended December 31,  
     2011     2010     2009  

Revenues:

      

Net earned premiums and other considerations

   $ 1,064,023      $ 1,101,395      $ 1,052,137   

Net investment income

     129,640        132,388        133,365   

Fees and other income

     25,382        25,152        28,343   
  

 

 

   

 

 

   

 

 

 

Total revenues

     1,219,045        1,258,935        1,213,845   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses:

      

Policyholder benefits

     767,723        766,049        757,070   

Selling, underwriting and general expenses

     386,013        395,759        392,901   
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     1,153,736        1,161,808        1,149,971   
  

 

 

   

 

 

   

 

 

 

Segment income before provision for income tax

     65,309        97,127        63,874   

Provision for income taxes

     22,196        33,589        21,718   
  

 

 

   

 

 

   

 

 

 

Segment net income

   $ 43,113      $ 63,538      $ 42,156   
  

 

 

   

 

 

   

 

 

 

Net earned premiums and other considerations:

      

By major product groupings:

      

Group dental

   $ 417,145      $ 420,690      $ 425,288   

Group disability single premiums for closed blocks (3)

     4,936        —          —     

All other group disability

     448,028        488,813        434,381   

Group life

     193,914        191,892        192,468   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,064,023      $ 1,101,395      $ 1,052,137   
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Loss ratio (1)

     72.2 %     69.6 %     72.0 %

Expense ratio (2)

     35.4 %     35.1 %     36.4 %

 

(1) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
(3) This represents single premium on closed blocks of group disability business. For closed blocks of business we receive a single, upfront premium and in turn we record a virtually equal amount of claim reserves. We then manage the claims using our claim management practices.

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Income

 

Segment net income decreased 32% to $43,113 for Twelve Months 2011 from $63,538 for Twelve Months 2010. Lower results were primarily attributable to less favorable disability and life insurance loss experience, partially offset by improved dental insurance experience. Twelve Months 2011 results include a decrease in the reserve interest discount rate primarily for new long-term disability claims as well as a $6,630 (after-tax) overall loss and loss adjustment expense reserve release (amounts are included in both policyholders benefits and selling, underwriting and general expenses) related to annual reserve adequacy studies in Twelve Months 2011 compared to $1,829 (after-tax) in Twelve Months 2010. Twelve Months 2010 general expenses included restructuring costs of $4,349 (after-tax). Twelve Months 2011 had no restructuring costs.

 

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Total Revenues.

 

Total revenues decreased $39,890 to $1,219,045 for Twelve Months Ended 2011 from $1,258,935 for Twelve Months Ended 2010. Excluding single premiums, net earned premiums and other considerations decreased $42,308. The decrease in net earned premiums and other considerations was primarily driven by the loss of policyholders as a result of pricing actions on a block of assumed disability reinsurance business.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses decreased $8,072 to $1,153,736 for Twelve Months 2011 from $1,161,808 for Twelve Months 2010. During Twelve Months 2011 policyholder benefits were reduced $10,500 based on the results of our annual reserve adequacy studies compared to $5,758 in Twelve Months 2010. Excluding the impact of the reserve adequacy studies, the loss ratio increased to 73.1% from 70.1%, primarily driven by less favorable loss experience across our disability and life insurance products.

 

Selling, underwriting and general expenses decreased 2% to $386,013 for Twelve Months 2011 from $395,759 for Twelve Months 2010, however the expense ratio increased slightly to 35.4% from 35.1% driven by lower net earned premiums. Twelve Months 2010 included $6,690 in restructuring costs. Twelve Months 2011 had no restructuring costs. In addition, general expenses were $2,644 lower in Twelve Months 2011 compared with Twelve Months 2010 due to our annual reserve adequacy studies. Excluding the restructuring costs and the reserve adequacy adjustment in both years, the expense ratio increased to 35.4% for Twelve Months 2011 from 34.3% for Twelve Months 2010.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net Income

 

Segment net income increased 51% to $63,538 for Twelve Months 2010 from $42,156 for Twelve Months 2009. The increase in net income was primarily attributable to favorable loss experience in all product lines. Favorable disability results and life mortality, as well as dental pricing actions, contributed to the improvement. Twelve Months 2010 includes restructuring charges of $4,349 (after-tax) compared to restructuring charges of $2,445 (after-tax) in Twelve Months 2009.

 

Total Revenues

 

Total revenues increased 4% to $1,258,935 for Twelve Months 2010 from $1,213,845 for Twelve Months 2009. Net earned premiums increased 5% or $49,258 mainly due to assumed premiums from two new clients in our DRMS distribution channel and the acquisition of a block of business from Shenandoah Life Insurance Company, all added in Fourth Quarter 2009. This was partially offset by decreases in our direct products as a result of a challenging sales and persistency environment which continues to affect revenue growth.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses increased 1% to $1,161,808 for Twelve Months 2010 from $1,149,971 for Twelve Months 2009. The loss ratio decreased to 69.6% in Twelve Months 2010 from 72.0% in Twelve Months 2009 primarily due to higher net earned premiums and favorable loss experience across the disability, life, and dental products. Disability incidence and life mortality levels continue to be very favorable compared to prior year.

 

The expense ratio decreased to 35.1% for Twelve Months 2010 from 36.4% for Twelve Months 2009 driven by higher net earned premiums and expense management initiatives partially offset by restructuring charges. Twelve Months 2010 includes $6,690 in restructuring charges compared to $3,760 in Twelve Months 2009.

 

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Corporate and Other

 

The table below presents information regarding the Corporate and Other segment’s results of operations:

 

     For the Years Ended December 31,  
     2011     2010     2009  

Revenues:

      

Net investment income

   $ 17,147      $ 17,873      $ 16,249   

Net realized gains (losses) on investments

     32,580        48,403        (53,597 )

Amortization of deferred gains on disposal of businesses

     20,461        10,406        22,461   

Fees and other income

     305        200        140,802   
  

 

 

   

 

 

   

 

 

 

Total revenues

     70,493        76,882        125,915   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses:

      

Policyholder benefits

     6,474        (2,038 )     7,408   

Selling, underwriting and general expenses

     102,359        101,830        93,769   

Interest expense

     60,360        60,646        60,669   
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     169,193        160,438        161,846   
  

 

 

   

 

 

   

 

 

 

Segment loss before benefit for income taxes

     (98,700     (83,556 )     (35,931 )

Benefit for income taxes

     (113,922     (24,054 )     (11,520 )
  

 

 

   

 

 

   

 

 

 

Segment net income (loss)

   $ 15,222      $ (59,502 )   $ (24,411 )
  

 

 

   

 

 

   

 

 

 

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

 

Net Income (Loss)

 

Segment results increased $74,724 to net income of $15,222 for Twelve Months 2011 compared to a net loss of $(59,502) for Twelve Months 2010. This increase is mainly due to an $80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011.

 

Total Revenues

 

Total revenues decreased $6,389, to $70,493 for Twelve Months 2011 compared with $76,882 for Twelve Months 2010. This decrease is primarily due to a decline of $15,823 in realized gains on investments partially offset by $10,055 of increased amortization of deferred gains on disposal of businesses. During 2010 a portion of the deferred gain liability was re-established resulting from refinements to assumptions associated with policy run-off.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses increased $8,755 to $169,193 for Twelve Months 2011 compared with $160,438 for Twelve Months 2010. The increase is primarily attributable to increased claims payable accruals of $6,474 associated with discontinued businesses.

 

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

 

Net Loss

 

Segment net loss increased $35,091 to $(59,502) for Twelve Months 2010 compared to a net loss of $(24,411) for Twelve Months 2009. This increase is mainly due to the non-recurrence of an $83,542 (after-tax) favorable legal settlement, net of attorney fees and allowances for related recoverables with Willis Limited in Twelve Months 2009. In addition, amortization of deferred gains on disposal of businesses declined $7,836 (after-tax) as a portion of the deferred gain liability was re-established during the fourth quarter of 2010 resulting from refinements to assumptions associated with policy run-off. Partially offsetting these items is a $66,300 (after-tax) increase in realized gains on investments.

 

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Total Revenues

 

Total revenues decreased $49,033, to $76,882 for Twelve Months 2010 compared with $125,915 for Twelve Months 2009. This decrease is primarily due to the above-mentioned favorable legal settlement of $139,000 with Willis Limited in Twelve Months 2009, partially offset by increased net realized gains on investments of $102,000. In addition, amortization of deferred gains on disposal of businesses declined $12,055 for reasons noted above.

 

Total Benefits, Losses and Expenses

 

Total benefits, losses and expenses remained relatively flat at $160,438 for Twelve Months 2010 compared with $161,846 for Twelve Months 2009.

 

Goodwill Impairment

 

During 2010 and 2009, the Company recorded goodwill impairments of $306,381 and $83,000, respectively. No goodwill impairment was recorded during 2011. The goodwill accounting guidance in effect during 2010 and 2009 required that goodwill be tested for impairment using a two step process. Step 1 of the test identifies potential impairments at the reporting unit level, which for the Company is the same as our operating segments, by comparing the estimated fair value of each reporting unit to its net book value. If the estimated fair value of a reporting unit exceeds its net book value, there is no impairment of goodwill and Step 2 is unnecessary. However, if the net book value exceeds the estimated fair value, then Step 1 is failed, and Step 2 is performed to determine the amount of the potential impairment. Step 2 utilizes acquisition accounting guidance and requires the fair value calculation of all individual assets and liabilities of the reporting unit (excluding goodwill, but including any unrecognized intangible assets). The net fair value of assets less liabilities is then compared to the reporting unit’s total estimated fair value as calculated in Step 1. The excess of fair value over the net asset value equals the implied fair value of goodwill. The implied fair value of goodwill is then compared to the carrying value of goodwill to determine the reporting unit’s goodwill impairment. During 2011, the Company adopted the amended guidance on intangibles-goodwill and other. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, described above. For the Assurant Specialty Property reporting unit, the Company chose the option to first perform the qualitative assessment. For the Assurant Solutions reporting unit, the Company performed a Step 1 test consistent with prior years. See “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Factors Affecting Results-Critical Accounting Estimates-Valuation and Recoverability of Goodwill” and Notes 2 and 11 to the Consolidated Financial Statements contained elsewhere in this report for more information.

 

Investments

 

The Company had total investments of $14,026,165 and $13,519,848 as of December 31, 2011 and December 31, 2010, respectively. For more information on our investments see Note 4 to the Notes to Consolidated Financial Statements included elsewhere in this report.

 

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The following table shows the credit quality of our fixed maturity securities portfolio as of the dates indicated:

 

     As of  

Fixed Maturity Securities by Credit Quality (Fair Value)

   December 31, 2011     December 31, 2010  

Aaa / Aa / A

   $ 6,620,808         59.1 %   $ 6,488,208         61.2 %

Baa

     3,692,709         33.0 %     3,227,216         30.4 %

Ba

     648,817         5.8 %     618,465         5.8 %

B and lower

     230,265         2.1 %     278,663         2.6 %
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 11,192,599         100.0 %   $ 10,612,552         100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 

 

Major categories of net investment income were as follows:

 

     Years Ended December 31,  
     2011     2010     2009  

Fixed maturity securities

   $ 565,486      $ 572,909      $ 558,639   

Equity securities

     29,645        33,864        38,189   

Commercial mortgage loans on real estate

     80,903        88,894        92,116   

Policy loans

     3,102        3,248        3,329   

Short-term investments

     5,351        5,259        7,933   

Other investments

     21,326        19,019        17,453   

Cash and cash equivalents

     7,838        5,577        8,359   
  

 

 

   

 

 

   

 

 

 

Total investment income

     713,651        728,770        726,018   
  

 

 

   

 

 

   

 

 

 

Investment expenses

     (24,119     (25,580 )     (27,180 )
  

 

 

   

 

 

   

 

 

 

Net investment income

   $ 689,532      $ 703,190      $ 698,838   
  

 

 

   

 

 

   

 

 

 

 

Net investment income decreased $13,658, or 2%, to $689,532 at December 31, 2011 from $703,190 at December 31, 2010. The decrease is due to lower overall investment yields.

 

Net investment income increased $4,352, or 1%, to $703,190 at December 31, 2010 from $698,838 at December 31, 2009. The increase is due to higher invested assets partially offset by lower investment yields.

 

The net unrealized gain position increased to $1,074,135 as of December 31, 2011, compared to $617,538 as of December 31, 2010 primarily due to declining U.S. Treasury yields.

 

As of December 31, 2011, the Company owned $221,742 of securities guaranteed by financial guarantee insurance companies. Included in this amount was $198,734 of municipal securities, with a credit rating of A+ both with and without the guarantee.

 

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 December 31, 2011 and December 31, 2010. At December 31, 2011 and December 31, 2010, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $164,347 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 December 31, 2011 and December 31, 2010, revenue bonds account for 51% and 48% of the holdings, respectively. Excluding pre-refunded bonds, sales tax, highway, transit, water and miscellaneous (which includes bond banks, finance authorities and appropriations) provide for 79% and 80% of the revenue sources, as of December 31, 2011 and December 31, 2010, respectively.

 

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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 December 31, 2011, approximately 63%, 13%, and 7% 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 December 31, 2011 and December 31, 2010.

 

The Company has European investment exposure in its corporate fixed maturity and equity securities of $868,012 with an unrealized gain of $61,387 at December 31, 2011 and $891,095 with an unrealized gain of $52,282 at December 31, 2010. Approximately 31% and 39% of the corporate European exposure are held in the financial industry at December 31, 2011 and December 31, 2010, respectively. No European country represented more than 5% of the fair value of our corporate securities as of December 31, 2011 and December 31, 2010. Approximately 5% of the fair value of the corporate European securities are pound and euro-denominated and are not hedged to U.S. dollars, but, held to support those foreign-denominated liabilities. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification.

 

The Company has exposure to sub-prime and related mortgages within our fixed maturity securities portfolio. At December 31, 2011, approximately 2.4% of our residential mortgage-backed holdings had exposure to sub-prime mortgage collateral. This represented approximately 0.2% of the total fixed income portfolio and 0.7% of the total unrealized gain position. Of the securities with sub-prime exposure, approximately 19.2% are rated as investment grade. All residential mortgage-backed securities, including those with sub-prime exposure, are reviewed as part of the ongoing other-than-temporary impairment monitoring process.

 

As required by the fair value measurements and disclosures guidance, the Company has identified and disclosed its financial assets in a fair value hierarchy, which consists of the following three levels:

 

   

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.

 

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 which include observable market inputs. Observable market inputs are the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. 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.

 

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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. If the Company cannot corroborate the non-binding broker quotes with Level 2 inputs, these securities are categorized as Level 3.

 

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,

 

   

Little information is released publicly,

 

   

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

 

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