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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2014

OR 

 

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

For the transition period from                      to                     

Assurant, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   001-31978   39-1126612

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

One Chase Manhattan Plaza, 41st Floor

New York, New York 10005

(212) 859-7000

(Address, including zip code, and telephone number, including area code, of Registrant’s Principal Executive Offices)

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

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

 

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

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

The number of shares of the registrant’s Common Stock outstanding at October 30, 2014 was 70,255,038.

 

 

 


Table of Contents

ASSURANT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

Item

Number

       Page
Number
 
   

PART I

FINANCIAL INFORMATION

      

1.

 

Financial Statements of Assurant, Inc.:

  
 

Consolidated Balance Sheets (unaudited) at September 30, 2014 and December 31, 2013

     2   
 

Consolidated Statements of Operations (unaudited) for the three and nine months ended September  30, 2014 and 2013

     4   
 

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2014 and 2013

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) from December 31, 2013 through September 30, 2014

     6   
 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September  30, 2014 and 2013

     7   
 

Notes to Consolidated Financial Statements (unaudited) for the three and nine months ended September 30, 2014 and 2013

     8   

2.

 

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

     44   

3.

 

Quantitative and Qualitative Disclosures About Market Risk

     65   

4.

 

Controls and Procedures

     65   
  PART II
OTHER INFORMATION
  

1.

 

Legal Proceedings

     66   

1A.

 

Risk Factors

     66   

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     68   

6.

 

Exhibits

     69   
 

Signatures

     70   

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

 

1


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2014 and December 31, 2013

 

 

     September 30, 2014      December 31, 2013  
    

(in thousands except number of shares and per

share amounts)

 

Assets

     

Investments:

     

Fixed maturity securities available for sale, at fair value (amortized cost - $10,482,812 in 2014 and $10,520,310 in 2013)

   $ 11,624,009       $ 11,291,875   

Equity securities available for sale, at fair value (cost - $458,965 in 2014 and $417,535 in 2013)

     521,707         458,358   

Commercial mortgage loans on real estate, at amortized cost

     1,253,424         1,287,032   

Policy loans

     48,979         51,678   

Short-term investments

     465,295         470,458   

Collateral held/pledged under securities agreements

     95,977         95,215   

Other investments

     599,423         589,399   
  

 

 

    

 

 

 

Total investments

     14,608,814         14,244,015   
  

 

 

    

 

 

 

Cash and cash equivalents

     1,411,266         1,717,184   

Premiums and accounts receivable, net

     1,340,200         1,080,171   

Reinsurance recoverables

     6,149,708         5,752,134   

Accrued investment income

     151,108         145,189   

Deferred acquisition costs

     3,277,810         3,128,931   

Property and equipment, at cost less accumulated depreciation

     274,419         253,630   

Goodwill

     816,818         784,561   

Value of business acquired

     47,492         53,549   

Other intangible assets, net

     369,021         354,636   

Other assets

     354,382         258,942   

Assets held in separate accounts

     1,872,091         1,941,747   
  

 

 

    

 

 

 

Total assets

   $ 30,673,129       $ 29,714,689   
  

 

 

    

 

 

 

 

See the accompanying notes to the consolidated financial statements

 

2


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2014 and December 31, 2013

 

 

     September 30, 2014     December 31, 2013  
    

(in thousands except number of shares and per

share amounts)

 

Liabilities

    

Future policy benefits and expenses

   $ 8,813,702      $ 8,646,572   

Unearned premiums

     6,784,089        6,662,672   

Claims and benefits payable

     3,577,964        3,389,371   

Commissions payable

     596,990        429,636   

Reinsurance balances payable

     110,507        106,932   

Funds held under reinsurance

     78,707        76,778   

Deferred gain on disposal of businesses

     88,362        99,311   

Obligation under securities agreements

     95,973        95,206   

Accounts payable and other liabilities

     1,793,509        1,662,348   

Deferred income taxes, net

     323,073        129,148   

Tax payable

     24,594        3,371   

Debt

     1,171,005        1,638,118   

Liabilities related to separate accounts

     1,872,091        1,941,747   
  

 

 

   

 

 

 

Total liabilities

     25,330,566        24,881,210   
  

 

 

   

 

 

 

Commitments and contingencies (Note 14)

    

Stockholders’ equity

    

Common stock, par value $0.01 per share, 800,000,000 shares authorized, 70,809,613 and 71,828,208 shares outstanding at September 30, 2014 and December 31, 2013, respectively

     1,490        1,482   

Additional paid-in capital

     3,117,645        3,087,533   

Retained earnings

     4,778,645        4,415,875   

Accumulated other comprehensive income

     659,746        426,830   

Treasury stock, at cost; 77,803,252 and 76,039,652 shares at September 30, 2014 and December 31, 2013, respectively

     (3,214,963     (3,098,241
  

 

 

   

 

 

 

Total stockholders’ equity

     5,342,563        4,833,479   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 30,673,129      $ 29,714,689   
  

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

3


Table of Contents

Assurant, Inc.

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

 

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014      2013     2014     2013  
    

(in thousands except number of shares and

per share amounts)

 

Revenues

         

Net earned premiums

   $ 2,257,809       $ 1,947,431      $ 6,490,005      $ 5,714,293   

Net investment income

     162,009         159,209        497,575        489,118   

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

     17,744         (2,429     43,612        31,573   

Total other-than-temporary impairment losses

             (1,230     (69     (1,409

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

             28        39        100   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment losses recognized in earnings

             (1,202     (30     (1,309

Amortization of deferred gain on disposal of businesses

     3,645         4,074        10,949        12,238   

Fees and other income

     261,281         151,567        716,850        401,126   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     2,702,488         2,258,650        7,758,961        6,647,039   
  

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

         

Policyholder benefits

     1,123,693         933,832        3,281,338        2,708,143   

Amortization of deferred acquisition costs and value of business acquired

     386,709         372,750        1,098,080        1,101,998   

Underwriting, general and administrative expenses

     953,559         737,326        2,681,135        2,168,367   

Interest expense

     13,776         20,771        44,617        57,369   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     2,477,737         2,064,679        7,105,170        6,035,877   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     224,751         193,971        653,791        611,162   

Provision for income taxes

     84,454         65,183        232,639        231,071   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 140,297       $ 128,788      $ 421,152      $ 380,091   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings Per Share

         

Basic

   $ 1.94       $ 1.70      $ 5.80      $ 4.89   

Diluted

   $ 1.92       $ 1.68      $ 5.74      $ 4.84   

Dividends per share

   $ 0.27       $ 0.25      $ 0.79      $ 0.71   

Share Data

         

Weighted average shares outstanding used in basic per share calculations

     72,182,547         75,544,542        72,561,191        77,662,796   

Plus: Dilutive securities

     864,157         915,249        866,171        899,205   
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares used in diluted per share calculations

     73,046,704         76,459,791        73,427,362        78,562,001   
  

 

 

    

 

 

   

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

4


Table of Contents

Assurant, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

 

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  
     (in thousands)  

Net income

   $ 140,297      $ 128,788      $ 421,152      $ 380,091   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Change in unrealized gains on securities, net of taxes of $27,439, $21,164, $(129,418) and $220,190, respectively

     (51,617     (43,305     259,350        (431,554

Change in other-than-temporary impairment gains, net of taxes of $48, $(150), $(1,236) and $(1,064), respectively

     (89     279        2,295        1,976   

Change in foreign currency translation, net of taxes of $(10,957), $(1,627), $1,396 and $4,178, respectively

     (54,264     5,578        (34,434     (28,653

Amortization of pension and postretirement unrecognized net periodic benefit cost, net of taxes of $(885), $(1,748), $(3,073) and $(7,610), respectively

     1,644        3,246        5,705        14,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (104,326     (34,202     232,916        (444,097
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 35,971      $ 94,586      $ 654,068      $ (64,006
  

 

 

   

 

 

   

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

5


Table of Contents

Assurant, Inc.

Consolidated Statement of Stockholders’ Equity (unaudited)

From December 31, 2013 through September 30, 2014

 

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Treasury
Stock
    Total  
     (in thousands)  

Balance at December 31, 2013

   $ 1,482       $ 3,087,533      $ 4,415,875      $ 426,830       $ (3,098,241   $ 4,833,479   

Stock plan exercises

     8         (19,290                           (19,282

Stock plan compensation expense

             35,015                              35,015   

Change in tax benefit from share-based payment arrangements

             14,387                              14,387   

Dividends

                    (58,382                    (58,382

Acquisition of common stock

                                   (116,722     (116,722

Net income

                    421,152                       421,152   

Other comprehensive income

                           232,916                232,916   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2014

   $ 1,490       $ 3,117,645      $ 4,778,645      $ 659,746       $ (3,214,963   $ 5,342,563   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See the accompanying notes to the consolidated financial statements

 

6


Table of Contents

Assurant, Inc.

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended September 30, 2014 and 2013

 

 

     Nine Months Ended September 30,  
     2014     2013  
     (in thousands)  

Net cash provided by operating activities

   $ 514,664      $ 724,038   
  

 

 

   

 

 

 

Investing activities

    

Sales of:

    

Fixed maturity securities available for sale

     1,288,291        1,814,687   

Equity securities available for sale

     83,488        173,499   

Other invested assets

     60,598        42,312   

Property and equipment and other

     173        154   

Maturities, calls, prepayments, and scheduled redemption of:

    

Fixed maturity securities available for sale

     585,263        695,398   

Commercial mortgage loans on real estate

     119,085        150,920   

Purchases of:

    

Fixed maturity securities available for sale

     (1,877,572     (2,446,127

Equity securities available for sale

     (122,071     (168,097

Commercial mortgage loans on real estate

     (88,531     (109,504

Other invested assets

     (28,402     (37,524

Property and equipment and other

     (58,879     (33,519

Subsidiaries, net of cash transferred (1)

     (88,155     (49,987

Equity interest (2)

     (20,950       

Change in short-term investments

     2,326        (673,579

Change in policy loans

     2,576        823   

Change in collateral held/pledged under securities agreements

     (768     (1,047
  

 

 

   

 

 

 

Net cash used in investing activities

     (143,528     (641,591
  

 

 

   

 

 

 

Financing activities

    

Issuance of debt

            698,093   

Repayment of debt

     (467,330     (32,310

Change in tax benefit from share-based payment arrangements

     14,387        (1,724

Acquisition of common stock

     (115,866     (299,624

Dividends paid

     (58,382     (55,777

Payment of contingent obligations (3)

     (31,871       

Change in obligation under securities agreements

     768        1,047   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (658,294     309,705   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (18,760     (14,859
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (305,918     377,293   

Cash and cash equivalents at beginning of period

     1,717,184        909,404   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,411,266      $ 1,286,697   
  

 

 

   

 

 

 

 

(1) 2014 includes the acquisitions of StreetLinks, LLC and eMortgage Logic, LLC. 2013 includes the acquisition of Field Asset Services.
(2) Relates to the purchase of equity interest in Iké Asistencia.
(3) Relates to the delayed and contingent liability payments established at the time of acquisition of Lifestyle Services Group. Change in amount paid, in comparison to December 31, 2013 amount disclosed, is mainly due to foreign currency translation.

See the accompanying notes to the consolidated financial statements

 

7


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

1. Nature of Operations

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

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

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

2. Basis of Presentation

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

The interim financial data as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of the results for the interim periods. The unaudited interim consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation.

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”) introduced new and significant premium stabilization programs in 2014. These programs required the Company to record amounts to our consolidated financial statements based on assumptions and estimates which could materially change as experience develops.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

3. Recent Accounting Pronouncements

Adopted

On January 1, 2014, the Company adopted the new guidance on presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this guidance state that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception to this guidance would be where a net operating loss carryforward or similar tax loss or credit carryforward would not be available under the tax law to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. In such a case, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of this new presentation guidance did not impact the Company’s financial position or results of operations.

On January 1, 2014, the Company adopted the other expenses guidance that addresses 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 Company’s adoption of this guidance impacts the results of our Assurant

 

8


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Health and Assurant Employee Benefits segments. During the third quarter of 2014, the final assessment of the annual insurer fee of $25,723 was paid to the federal government. As a result of this payment, the estimated liability for the mandated fees was reduced to $0. For the nine months ended September 30, 2014, the Company recorded $19,292 of amortization expense related to the deferred costs in underwriting, general and administrative expenses in the consolidated statements of operations, resulting in an ending balance in deferred costs, recorded in other assets on the consolidated balance sheet, of $6,431 as of September 30, 2014.

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on revenue recognition. The amended guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Insurance contracts are within the scope of other standards and therefore are specifically excluded from the scope of the amended revenue recognition guidance. The core principle of the amended guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the entity applies a five step process outlined in the amended guidance. The amended guidance also includes a cohesive set of disclosure requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Therefore, the Company is required to adopt the guidance on January 1, 2017. An entity can choose to apply the amended guidance using either the full retrospective approach or a modified retrospective approach. The Company is currently evaluating the requirements of the revenue recognition guidance as it relates to its non-insurance contract revenue and the potential impact on the Company’s financial position and results of operations.

4. Acquisitions

As previously disclosed, on December 30, 2013, the Company paid Mex$1,191,499 (U.S.D. $91,420) for a 40% investment in the Mexican operations of Iké Asistencia (“Iké”), an assistance services business with operations in Mexico and other countries in Latin America. In addition, on February 10, 2014, the Company made a previously disclosed payment of Mex$272,541 (U.S.D. $20,950) for 40% of Iké’s Latin American operations. Following the February 10, 2014 payment, the Company owns 40% of the equity interests and outstanding shares of Iké and, under the terms of the agreements, will also have options to acquire the remaining interest in Iké over time.

On March 24, 2014, the Company made the required delayed payment of £3,000 ($4,951) and contingent payment of £16,313 ($26,920) to complete the previously disclosed October 25, 2013 acquisition of Lifestyle Services Group. The contingent payment was made given the stipulated contractual renewal of a key client.

On April 16, 2014, the Company acquired StreetLinks, LLC, a leading independent appraisal management company, from Novation Companies, Inc. The acquisition-date fair value of the consideration transferred totaled $65,905, which consists of an initial cash payment of $60,905 and a contingent payment of $5,000. The contingent consideration arrangement is based on future expected revenue. In connection with the acquisition, the Company recorded $47,970 of customer and technology based intangible assets, all of which are amortizable over a 2 to 12 year period, and $14,738 of goodwill, none of which is tax-deductible. The primary factor contributing to the recognition of goodwill is the future expected growth of this business within Assurant Specialty Property.

On September 3, 2014, the Company acquired eMortgage Logic, LLC, a national provider of residential valuation products and valuation technology services. The acquisition-date fair value totaled $28,263, which primarily consists of an initial cash payment of $17,000 and a contingent payment of $10,231. The contingent consideration arrangement is based on future expected revenue. In connection with the acquisition, the Company recorded $11,270 of customer and technology based intangible assets, all of which are amortizable over a 3 to 11 year period, and $14,058 of goodwill, all of which is tax-deductible. The primary factor contributing to the recognition of goodwill is the future expected growth of this business within Assurant Specialty Property.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

5. Investments

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

 

     September 30, 2014  
     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      OTTI in
AOCI
(a)
 

Fixed maturity securities:

             

United States government and government agencies and authorities

   $ 172,994       $ 5,053       $ (639   $ 177,408       $   

States, municipalities and political subdivisions

     758,072         72,812         (517     830,367           

Foreign governments

     610,000         60,062         (1,706     668,356           

Asset-backed

     4,061         1,729         (32     5,758         1,620   

Commercial mortgage-backed

     56,527         1,534                58,061           

Residential mortgage-backed

     949,236         51,815         (3,446     997,605         19,404   

Corporate

     7,931,922         966,302         (11,770     8,886,454         23,163   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 10,482,812       $ 1,159,307       $ (18,110   $ 11,624,009       $ 44,187   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

             

Common stocks

   $ 21,129       $ 13,743       $ (49   $ 34,823       $   

Non-redeemable preferred stocks

     437,836         51,485         (2,437     486,884           
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 458,965       $ 65,228       $ (2,486   $ 521,707       $   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2013  
     Cost or
Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value      OTTI in
AOCI
(a)
 

Fixed maturity securities:

             

United States government and government agencies and authorities

   $ 408,378       $ 4,166       $ (1,888   $ 410,656       $   

States, municipalities and political subdivisions

     774,233         63,543         (2,624     835,152           

Foreign governments

     647,486         35,543         (7,608     675,421           

Asset-backed

     4,320         1,910         (56     6,174         1,773   

Commercial mortgage-backed

     57,594         2,850         (82     60,362           

Residential mortgage-backed

     919,216         41,905         (13,217     947,904         19,525   

Corporate

     7,709,083         684,776         (37,653     8,356,206         19,359   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 10,520,310       $ 834,693       $ (63,128   $ 11,291,875       $ 40,657   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

             

Common stocks

   $ 17,890       $ 11,352       $ (10   $ 29,232       $   

Non-redeemable preferred stocks

     399,645         38,880         (9,399     429,126           
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 417,535       $ 50,232       $ (9,409   $ 458,358       $   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) Represents the amount of OTTI recognized in accumulated other comprehensive income (“AOCI”). Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Our states, municipalities and political subdivisions holdings are highly diversified across the U.S. and Puerto Rico, with no individual state’s exposure (including both general obligation and revenue securities) exceeding 0.5% of the overall investment portfolio as of September 30, 2014 and December 31, 2013. At September 30, 2014 and December 31, 2013, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $275,657 and $234,640, respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As of September 30, 2014 and December 31, 2013, revenue bonds account for 51% and 53% of the holdings, respectively. Excluding pre-refunded revenue bonds, the activities supporting the income streams of the Company’s revenue bonds are across a broad range of sectors, primarily highway, water, airport and marina, higher education, specifically pledged tax revenues, and other miscellaneous sources such as bond banks, finance authorities and appropriations.

The Company’s investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, which allow the assets and liabilities to be more appropriately matched. At September 30, 2014, approximately 74%, 11% and 5% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. At December 31, 2013, approximately 70%, 15% and 6% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. No other country represented more than 3% of our foreign government securities as of September 30, 2014 and December 31, 2013.

The Company has European investment exposure in its corporate fixed maturity and equity securities of $1,075,379 with an unrealized gain of $108,088 at September 30, 2014 and $1,082,129 with an unrealized gain of $78,126 at December 31, 2013. Approximately 23% and 25% of the corporate European exposure is held in the financial industry at September 30, 2014 and December 31, 2013, respectively. Our largest European country exposure represented approximately 5% and 6% of the fair value of our corporate securities as of September 30, 2014 and December 31, 2013, respectively. 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 cost or amortized cost and fair value of fixed maturity securities at September 30, 2014 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Cost or
Amortized
Cost
     Fair Value  

Due in one year or less

   $ 339,714       $ 344,017   

Due after one year through five years

     2,437,561         2,571,729   

Due after five years through ten years

     2,690,101         2,832,899   

Due after ten years

     4,005,612         4,813,940   
  

 

 

    

 

 

 

Total

     9,472,988         10,562,585   

Asset-backed

     4,061         5,758   

Commercial mortgage-backed

     56,527         58,061   

Residential mortgage-backed

     949,236         997,605   
  

 

 

    

 

 

 

Total

   $ 10,482,812       $ 11,624,009   
  

 

 

    

 

 

 

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Proceeds from sales

   $ 401,627       $ 525,996       $ 1,403,671       $ 2,028,274   

Gross realized gains

     18,109         9,865         49,696         46,290   

Gross realized losses

     1,607         12,339         8,174         23,391   

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

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

        

Fixed maturity securities

   $ 17,848      $ (2,232   $ 39,538      $ 20,215   

Equity securities

     (149     82        4,988        4,753   

Other investments

     45        (279     (914     6,605   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gains (losses) related to sales and other

     17,744        (2,429     43,612        31,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Fixed maturity securities

            (660     (30     (767

Other investments

            (542            (542
  

 

 

   

 

 

   

 

 

   

 

 

 

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

            (1,202     (30     (1,309
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gains (losses)

   $ 17,744      $ (3,631   $ 43,582      $ 30,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other-Than-Temporary Impairments

The Company follows the OTTI guidance which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.

There was no OTTI for the three months ended September 30, 2014. For the nine months ended September 30, 2014, the Company recorded $69 of OTTI, of which $30 was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $39 related to all other factors and recorded as an unrealized loss component of AOCI. For the three and nine months ended September 30, 2013, the Company recorded $1,230 and $1,409, respectively, of OTTI, of which $1,202 and $1,309, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $28 and $100, respectively, related to all other factors and recorded as an unrealized loss component of AOCI.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

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

 

     Three Months Ended September 30,  
     2014     2013  

Balance, June 30,

   $ 39,248      $ 93,745   

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

     (506     (597

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

     (1,662     (190
  

 

 

   

 

 

 

Balance, September 30,

   $ 37,080      $ 92,958   
  

 

 

   

 

 

 
     Nine Months Ended September 30,  
     2014     2013  

Balance, January 1,

   $ 45,278      $ 95,589   

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

     30        107   

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

     (3,151     (1,465

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

     (5,077     (1,273
  

 

 

   

 

 

 

Balance, September 30,

   $ 37,080      $ 92,958   
  

 

 

   

 

 

 

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. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value.

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

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

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

The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2014 and December 31, 2013 were as follows:

 

     September 30, 2014  
     Less than 12 months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 37,746       $ (104   $ 24,895       $ (535   $ 62,641       $ (639

States, municipalities and political subdivisions

     7,080         (383     4,565         (134     11,645         (517

Foreign governments

     43,539         (112     46,480         (1,594     90,019         (1,706

Asset-backed

                    1,462         (32     1,462         (32

Residential mortgage-backed

     104,337         (379     124,490         (3,067     228,827         (3,446

Corporate

     720,525         (7,245     196,815         (4,525     917,340         (11,770
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 913,227       $ (8,223   $ 398,707       $ (9,887   $ 1,311,934       $ (18,110
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

               

Common stock

   $ 1,078       $ (46   $ 193       $ (3   $ 1,271       $ (49

Non-redeemable preferred stocks

     58,042         (756     31,314         (1,681     89,356         (2,437
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 59,120       $ (802   $ 31,507       $ (1,684   $ 90,627       $ (2,486
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2013  
     Less than 12 months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 52,615       $ (1,464   $ 3,514       $ (424   $ 56,129       $ (1,888

States, municipalities and political subdivisions

     30,145         (2,624                    30,145         (2,624

Foreign governments

     217,708         (7,596     111         (12     217,819         (7,608

Asset-backed

                    1,442         (56     1,442         (56

Commercial mortgage-backed

     5,036         (82                    5,036         (82

Residential mortgage-backed

     407,808         (11,667     31,498         (1,550     439,306         (13,217

Corporate

     1,412,611         (36,848     19,291         (805     1,431,902         (37,653
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

   $ 2,125,923       $ (60,281   $ 55,856       $ (2,847   $ 2,181,779       $ (63,128
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities:

               

Common stock

   $ 187       $ (10   $       $      $ 187       $ (10

Non-redeemable preferred stocks

     159,723         (8,200     11,807         (1,199     171,530         (9,399
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

   $ 159,910       $ (8,210   $ 11,807       $ (1,199   $ 171,717       $ (9,409
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

14


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Total gross unrealized losses represent approximately 2% and 3% of the aggregate fair value of the related securities at September 30, 2014 and December 31, 2013, respectively. Approximately 44% and 94% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2014 and December 31, 2013, respectively. The total gross unrealized losses are comprised of 477 and 667 individual securities at September 30, 2014 and December 31, 2013, respectively. In accordance with its policy described above, the Company concluded that for these securities an adjustment to its results of operations for other-than-temporary impairments of the gross unrealized losses was not warranted at September 30, 2014 and December 31, 2013. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. As of September 30, 2014, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in the Company’s foreign governments, residential mortgage-backed, and corporate fixed maturity securities, and in non-redeemable preferred stocks. Within the Company’s corporate fixed maturity securities, the majority of the loss position relates to securities in the industrial sector. The industrial sector’s gross unrealized losses of twelve months or more were $1,365, or 30%, of the corporate fixed maturity securities total. The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, we apply an impairment model similar to that used for our fixed maturity securities. As of September 30, 2014, the Company did not intend to sell these securities and it was not more likely than not that the Company would be required to sell them and no underlying cash flow issues were noted. Therefore, the Company did not recognize an OTTI on those perpetual preferred securities that had been in a continuous unrealized loss position for twelve months or more. As of September 30, 2014, the Company did not intend to sell the fixed maturity securities and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of their amortized cost basis. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium.

The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. At September 30, 2014, approximately 39% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Utah. Although the Company has a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans ranges in size from $6 to $15,288 at September 30, 2014 and from $9 to $15,574 at December 31, 2013.

Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the third quarter.

 

15


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

The following summarizes our loan-to-value and average debt-service coverage ratios as of the dates indicated:

 

     September 30, 2014  

Loan-to-Value

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

70% and less

   $ 1,129,193        89.8     2.03   

71 – 80%

     87,488        7.0     1.25   

81 – 95%

     34,694        2.7     0.97   

Greater than 95%

     6,531        0.5     0.43   
  

 

 

   

 

 

   

Gross commercial mortgage loans

     1,257,906        100     1.94   
    

 

 

   

Less valuation allowance

     (4,482    
  

 

 

     

Net commercial mortgage loans

   $ 1,253,424       
  

 

 

     
     December 31, 2013  

Loan-to-Value

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

70% and less

   $ 1,143,200        88.5     1.97   

71 – 80%

     73,603        5.7     1.44   

81 – 95%

     58,752        4.6     1.19   

Greater than 95%

     15,959        1.2     0.87   
  

 

 

   

 

 

   

Gross commercial mortgage loans

     1,291,514        100     1.89   
    

 

 

   

Less valuation allowance

     (4,482    
  

 

 

     

Net commercial mortgage loans

   $ 1,287,032       
  

 

 

     

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

Collateralized Transactions

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

As of September 30, 2014 and December 31, 2013, our collateral held under securities lending agreements, of which its use is unrestricted, was $95,977 and $95,215, respectively, and is included in the consolidated balance sheets under the collateral held/pledged under securities agreements. Our liability to the borrower for collateral received was $95,973 and $95,206, respectively, and is included in the consolidated balance sheets under obligation under securities agreements. The difference between the collateral held and obligations under securities lending is recorded as an unrealized gain (loss) and is included as part of AOCI. There was one security in an unrealized loss position as of September 30, 2014 and it has been in an unrealized loss position for less than 12 months. All securities were in an unrealized gain position as of December 31, 2013. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

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

6. Fair Value Disclosures

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures

The fair value measurements and disclosures guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The levels of the fair value hierarchy are described below:

 

   

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access.

 

   

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

 

   

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

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013. The amounts presented below for Collateral held/pledged under securities agreements, Other investments, Cash equivalents, Other assets, Assets and Liabilities held in separate accounts and Other liabilities differ from the amounts presented in the consolidated balance sheets because only certain investments or certain assets and liabilities within these line items are measured at estimated fair value. Other investments are comprised of investments in the Assurant Investment Plan, American Security Insurance Company Investment Plan, Assurant Deferred Compensation Plan, a modified coinsurance arrangement and other derivatives. Other liabilities are comprised of investments in the Assurant Investment Plan, contingent consideration related to a business combination and other derivatives. The fair value amount and the majority of the associated levels presented for Other investments and Assets and Liabilities held in separate accounts are received directly from third parties.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

     September 30, 2014  
     Total      Level 1     Level 2     Level 3  

Financial Assets

         

Fixed maturity securities:

         

United States Government and government agencies and authorities

   $ 177,408       $      $ 177,408      $   

State, municipalities and political subdivisions

     830,367                830,367          

Foreign governments

     668,356         705        667,651          

Asset-backed

     5,758                5,758          

Commercial mortgage-backed

     58,061                57,608        453   

Residential mortgage-backed

     997,605                997,605          

Corporate

     8,886,454                8,771,973        114,481   

Equity securities:

         

Common stocks

     34,823         34,139        684          

Non-redeemable preferred stocks

     486,884                482,839        4,045   

Short-term investments

     465,295         392,642  b      72,653  c        

Collateral held/pledged under securities agreements

     74,976         66,971  b      8,005  c        

Other investments

     268,842         58,021  a      208,234  c      2,587  d 

Cash equivalents

     821,233         818,528  b      2,705  c        

Other assets

     1,735                755  f      980  e 

Assets held in separate accounts

     1,820,241         1,639,251  a      180,990  c        
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial assets

   $ 15,598,038       $ 3,010,257      $ 12,465,235      $ 122,546   
  

 

 

    

 

 

   

 

 

   

 

 

 

Financial Liabilities

         

Other liabilities

   $ 86,155       $ 58,021  a    $ 34  f    $ 28,100  f 

Liabilities related to separate accounts

     1,820,241         1,639,251  a      180,990  c        
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial liabilities

   $ 1,906,396       $ 1,697,272      $ 181,024      $ 28,100   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

     December 31, 2013  
     Total      Level 1     Level 2     Level 3  

Financial Assets

         

Fixed maturity securities:

         

United States Government and government agencies and authorities

   $ 410,656       $      $ 410,656      $   

State, municipalities and political subdivisions

     835,152                812,495        22,657   

Foreign governments

     675,421         789        657,775        16,857   

Asset-backed

     6,174                6,174          

Commercial mortgage-backed

     60,362                59,764        598   

Residential mortgage-backed

     947,904                943,737        4,167   

Corporate

     8,356,206                8,240,862        115,344   

Equity securities:

         

Common stocks

     29,232         28,548        684          

Non-redeemable preferred stocks

     429,126                421,616        7,510   

Short-term investments

     470,458         273,518  b      196,940  c        

Collateral held/pledged under securities agreements

     74,212         67,202  b      7,010  c        

Other investments

     246,748         66,659  a      175,918  c      4,171  d 

Cash equivalents

     1,233,701         967,372  b      266,329  c        

Other assets

     3,726                1,235  f      2,491  e 

Assets held in separate accounts

     1,887,988         1,696,811  a      191,177  c        
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial assets

   $ 15,667,066       $ 3,100,899      $ 12,392,372      $ 173,795   
  

 

 

    

 

 

   

 

 

   

 

 

 

Financial Liabilities

         

Other liabilities

   $ 106,992       $ 54,794  a    $ 31,868  g    $ 20,330  f 

Liabilities related to separate accounts

     1,887,988         1,696,811  a      191,177  c        
  

 

 

    

 

 

   

 

 

   

 

 

 

Total financial liabilities

   $ 1,994,980       $ 1,751,605      $ 223,045      $ 20,330   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

  a. Mainly includes mutual funds.
  b. Mainly includes money market funds.
  c. Mainly includes fixed maturity securities.
  d. Mainly includes fixed maturity securities and other derivatives.
  e. Mainly includes the Consumer Price Index Cap Derivatives (“CPI Caps”).
  f. Mainly includes other derivatives.
  g. Mainly includes contingent consideration liability related to a business combination.

There were no transfers between Level 1 and Level 2 financial assets during either period. However, there were transfers between Level 2 and Level 3 financial assets during the periods, which are reflected in the “Transfers in” and “Transfers out” columns below. Transfers between Level 2 and Level 3 most commonly occur from changes in the availability of observable market information and re-evaluation of the observability of pricing inputs. Any remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets and liabilities carried at fair value during the three and nine months ended September 30, 2014 and 2013:

 

     Three Months Ended September 30, 2014  
     Balance,
beginning
of
period
    Total gains
(losses)
(realized/
unrealized)
included in
earnings (1)
    Net unrealized
(losses) gains
included  in
other
comprehensive
income  (2)
    Purchases      Sales     Transfers
in (3)
     Transfers
out (3)
    Balance,
end of
period
 

Financial Assets

                  

Fixed Maturity Securities

                  

Commercial mortgage-backed

   $ 503      $      $ (5   $       $ (45   $       $      $ 453   

Corporate

     116,827        1,684        (1,840     9,637         (3,325     1,515         (10,017     114,481   

Equity Securities

                  

Non-redeemable preferred stocks

     4,099        (1     (53                                   4,045   

Other investments

     2,615        (437     2        439         (32                    2,587   

Other assets

     2,268        (1,288                                          980   

Financial Liabilities

                  

Other liabilities

     (23,160     (4,940                                          (28,100
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total level 3 assets and liabilities

   $ 103,152      $ (4,982   $ (1,896   $ 10,076       $ (3,402   $ 1,515       $ (10,017   $ 94,446   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

      Three Months Ended September 30, 2013  
     Balance,
beginning  of
period
    Total
(losses)
gains
(realized/
unrealized)
included in
earnings (1)
    Net unrealized
(losses) gains
included  in
other
comprehensive
income  (2)
    Purchases     Sales     Transfers
in (3)
     Transfers
out (3)
    Balance,
end of
period
 

Financial Assets

                 

Fixed Maturity Securities

                 

United States Government and government agencies and authorities

   $ 84      $      $      $      $ (84   $       $      $   

Foreign governments

     21,032        (2     (433                                  20,597   

Commercial mortgage-backed

     683                             (42                    641   

Residential mortgage-backed

     20,326        (18     64               (583             (9,004     10,785   

Corporate

     133,623        109        (2,070            (1,543             (6,965     123,154   

Equity Securities

                 

Non-redeemable preferred stocks

     2,301               289                      3,527                6,117   

Other investments

     10,601        85        693               (636                    10,743   

Other assets

     2,963        (217                                         2,746   

Financial Liabilities

                 

Other liabilities

     (1,590     (589            (1,897                           (4,076
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total level 3 assets and liabilities

   $ 190,023      $ (632   $ (1,457   $ (1,897   $ (2,888   $ 3,527       $ (15,969   $ 170,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

     Nine Months Ended September 30, 2014  
     Balance,
beginning  of
period
    Total
(losses)
gains
(realized/
unrealized)
included in
earnings (1)
    Net unrealized
gains (losses)
included  in
other
comprehensive
income  (2)
    Purchases     Sales     Transfers
in  (3)
     Transfers
out  (3)
    Balance,
end  of
period
 

Financial Assets

                 

Fixed Maturity Securities

                 

States, municipalities and political subdivisions

   $ 22,657      $      $      $      $      $       $ (22,657   $   

Foreign governments

     16,857        (2     18                              (16,873       

Commercial mortgage-backed

     598               (14            (131                    453   

Residential mortgage-backed

     4,167                                            (4,167       

Corporate

     115,344        1,739        2,286        19,578        (8,608     1,515         (17,373     114,481   

Equity Securities

                 

Non-redeemable preferred stocks

     7,510        327        (186            (1,830             (1,776     4,045   

Other investments

     4,171        (1,952     11        439        (82                    2,587   

Other assets

     2,491        (1,511                                         980   

Financial Liabilities

                 

Other liabilities

     (20,330     (3,770            (4,000                           (28,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total level 3 assets and liabilities

   $ 153,465      $ (5,169   $ 2,115      $ 16,017      $ (10,651   $ 1,515       $ (62,846   $ 94,446   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

     Nine Months Ended September 30, 2013  
     Balance,
beginning  of
period
    Total
(losses)
gains
(realized/
unrealized)
included in
earnings (1)
    Net unrealized
(losses) gains
included  in
other
comprehensive
income  (2)
    Purchases     Sales     Transfers
in (3)
     Transfers
out (3)
    Balance,
end of
period
 

Financial Assets

                 

Fixed Maturity Securities

                 

United States Government and government agencies and authorities

   $ 4,175      $      $ (3   $      $ (4,172   $       $      $   

Foreign governments

     23,097        (4     (2,496                                  20,597   

Commercial mortgage-backed

     1,774        20        (30            (1,123                    641   

Residential mortgage-backed

     8,211        (31     (1,145     29,938        (1,326             (24,862     10,785   

Corporate

     158,003        (390     (4,000     5,325        (25,045     4,997         (15,736     123,154   

Equity Securities

                 

Non-redeemable preferred stocks

     14        12        309        4,308        (2,040     3,527         (13     6,117   

Other investments

     11,327        (813     1,275        8        (1,054                    10,743   

Other assets

     5,886        (3,140                                         2,746   

Financial Liabilities

                 

Other liabilities

     (2,560     381               (1,897                           (4,076
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total level 3 assets and liabilities

   $ 209,927      $ (3,965   $ (6,090   $ 37,682      $ (34,760   $ 8,524       $ (40,611   $ 170,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Included as part of net realized gains on investments in the consolidated statement of operations.
(2) Included as part of change in unrealized gains on securities in the consolidated statement of comprehensive income.
(3) Transfers are primarily attributable to changes in the availability of observable market information and re-evaluation of the observability of pricing inputs.

Three different valuation techniques can be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date (such as for mutual funds and money market funds). Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.

Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques and the multi-period excess earnings method.

Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

While not all three approaches are applicable to all financial assets or liabilities, where appropriate, one or more valuation techniques may be used. For all the classes of financial assets and liabilities included in the above hierarchy, excluding the CPI Caps and certain privately placed corporate bonds, the market valuation technique is generally used. For certain privately placed corporate bonds, the CPI Caps, and certain derivatives, the income valuation technique is generally used. For the periods ended September 30, 2014 and December 31, 2013, the application of the valuation technique applied to the Company’s classes of financial assets and liabilities has been consistent.

Level 1 Securities

The Company’s investments and liabilities classified as Level 1 as of September 30, 2014 and December 31, 2013, consisted of mutual funds and money market funds, foreign government fixed maturities and common stocks that are publicly listed and/or actively traded in an established market.

Level 2 Securities

The Company’s Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs (“standard inputs”), listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research data. Further details for Level 2 investment types follow:

United States Government and government agencies and authorities: U.S. government and government agencies and authorities securities are priced by our pricing service utilizing standard inputs. Included in this category are U.S. Treasury securities which are priced using vendor trading platform data in addition to the standard inputs.

State, municipalities and political subdivisions: State, municipalities and political subdivisions securities are priced by our pricing service utilizing material event notices and new issue data inputs in addition to the standard inputs.

Foreign governments: Foreign government securities are primarily fixed maturity securities denominated in Canadian dollars which are priced by our pricing service utilizing standard inputs. The pricing service also evaluates each security based on relevant market information including relevant credit information, perceived market movements and sector news.

Commercial mortgage-backed, residential mortgage-backed and asset-backed: Commercial mortgage-backed, residential mortgage-backed and asset-backed securities are priced by our pricing service utilizing monthly payment information and collateral performance information in addition to the standard inputs. Additionally, commercial mortgage-backed securities and asset-backed securities utilize new issue data while residential mortgage-backed securities utilize vendor trading platform data.

Corporate: Corporate securities are priced by our pricing service utilizing standard inputs. Non-investment grade securities within this category are priced by our pricing service utilizing observations of equity and credit default swap curves related to the issuer in addition to the standard inputs. Certain privately placed corporate bonds are priced by a non-pricing service source using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons.

Non-redeemable preferred stocks: Non-redeemable preferred stocks are priced by our pricing service utilizing observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Short-term investments, collateral held/pledged under securities agreements, other investments, cash equivalents, and assets/liabilities held in separate accounts: To price the fixed maturity securities in these categories, the pricing service utilizes the standard inputs.

Other liabilities: The contingent consideration liability related to a business combination is valued at the contractual amount stated in the purchase agreement plus accrued interest. The contractual amount plus interest represents the fair value and is a market observable input due to the fact that the amount is specifically stated in the agreement and there is a short time frame (less than three months) for determining whether the payment will be made or not.

Valuation models used by the pricing service 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 securities.

Level 3 Securities

The Company’s investments classified as Level 3 as of September 30, 2014 and December 31, 2013 consisted of fixed maturity and equity securities and derivatives. All of the Level 3 fixed maturity and equity securities are priced using non-binding broker quotes which cannot be corroborated with Level 2 inputs. Of our total Level 3 fixed maturity and equity securities, $65,811 and $70,244 were priced by a pricing service using single broker quotes due to insufficient information to provide an evaluated price as of September 30, 2014 and December 31, 2013, respectively. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The remaining $53,626 and $97,219 were priced internally using independent and non-binding broker quotes as of September 30, 2014 and December 31, 2013, respectively. The inputs factoring into the broker quotes include trades in the actual bond being priced, trades of comparable bonds, quality of the issuer, optionality, structure and liquidity. Significant changes in interest rates, issuer credit, liquidity, and overall market conditions would result in a significantly lower or higher broker quote. The prices received from both the pricing service and internally are reviewed for reasonableness by management and if necessary, management works with the pricing service or broker to further understand how they developed their price. Further details on Level 3 derivative investment types follow:

Other investments and other liabilities: Swaptions are priced using a Black-Scholes pricing model incorporating third-party market data, including swap volatility data. Credit default swaps are priced using non-binding quotes provided by market makers or broker-dealers who are recognized as market participants. Inputs factored into the non-binding quotes include trades in the actual credit default swap which is being priced, trades in comparable credit default swaps, quality of the issuer, structure and liquidity. The net option related to the investment in Iké is valued using an income approach; specifically, a Monte Carlo simulation option pricing model. The inputs to the model include, but are not limited to, the projected normalized earnings before interest, tax, depreciation, and amortization (EBITDA) and free cash flow for the underlying asset, the discount rate, and the volatility of and the correlation between the normalized EBITDA and the value of the underlying asset. Significant increases (decreases) in the projected normalized EBITDA relative to the value of the underlying asset in isolation would result in a significantly higher (lower) fair value.

Other assets: A non-pricing service source prices the CPI Cap derivatives 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,

 

   

The prices are stale (i.e., not current), and

 

   

The magnitude of the bid-ask spread.

Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

The Company generally obtains one price for each financial asset. The Company performs a monthly analysis to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize our financial assets in the fair value hierarchy.

For the net option, the Company will perform a periodic analysis to assess if the evaluated price represents a reasonable estimate of the fair value for the financial liability. This process will involve quantitative and qualitative analysis overseen by finance and accounting professionals. Examples of procedures to be performed include, but are not limited to, initial and on-going review of the pricing methodology and review of the projection for the underlying asset including the probability distribution of possible scenarios.

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

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

The Company utilizes both the income and market valuation approaches to measure the fair value of its reporting units when required. Under the income approach, the Company determined the fair value of the reporting units considering distributable earnings, which were estimated from operating plans. The resulting cash flows were then discounted using a market participant weighted average cost of capital estimated for the reporting units. After discounting the future discrete earnings to their present value, the Company estimated the terminal value attributable to the years beyond the discrete operating plan period. The discounted terminal value was then added to the aggregate discounted distributable earnings from the discrete operating plan period to estimate the fair value of the reporting units. Under the market approach, the Company derived the fair value of the reporting units based on various financial multiples, including but not limited to: price to tangible book value of equity, price to estimated 2014 earnings and price to estimated 2014 earnings, which were estimated based on publicly available data related to comparable guideline companies. In addition, financial multiples were also estimated from publicly available purchase price data for acquisitions of companies operating in the insurance industry. The estimated fair value of the reporting units was more heavily weighted towards the income approach because in the current economic environment the earnings capacity of a business is generally considered the most important factor in the valuation of a business enterprise. This fair value determination was categorized as Level 3 (unobservable) in the fair value hierarchy.

Fair Value of Financial Instruments Disclosures

The financial instruments guidance requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets. However, this guidance excludes certain financial instruments, including those related to insurance contracts and those accounted for under the equity method and joint ventures guidance (such as real estate joint ventures).

For the financial instruments included within the following financial assets and financial liabilities, the carrying value in the consolidated balance sheets equals or approximates fair value. Please refer to the Fair Value Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures section above for more information on the financial instruments included within the following financial assets and financial liabilities and the methods and assumptions used to estimate fair value:

 

   

Cash and cash equivalents

 

   

Fixed maturity securities

 

   

Equity securities

 

   

Short-term investments

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

   

Collateral held/pledged under securities agreements

 

   

Other investments

 

   

Other assets

 

   

Assets held in separate accounts

 

   

Other liabilities

 

   

Liabilities related to separate accounts

In estimating the fair value of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets, the Company used the following methods and assumptions:

Commercial mortgage loans: the fair values of mortgage loans are estimated using discounted cash flow models. The model inputs include mortgage amortization schedules and loan provisions, an internally developed credit spread based on the credit risk associated with the borrower and the U.S. Treasury spot curve. Mortgage loans with similar characteristics are aggregated for purposes of the calculations.

Policy loans: the carrying value of policy loans reported in the consolidated balance sheets approximates fair value.

Policy reserves under investment products: the fair values for the Company’s policy reserves under investment products are determined using discounted cash flow analysis. Key inputs to the valuation include projections of policy cash flows, reserve run-off, market yields and risk margins.

Funds held under reinsurance: the carrying value reported approximates fair value due to the short maturity of the instruments.

Debt: the fair value of debt is based upon matrix pricing performed by the pricing service utilizing the standard inputs.

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

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

The following tables disclose the carrying value, fair value amount and hierarchy level of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets:

 

     September 30, 2014  
            Fair Value  
     Carrying
Value
     Total      Level 1      Level 2      Level 3  

Financial Assets

              

Commercial mortgage loans on real estate

   $ 1,253,424       $ 1,434,289       $       $       $ 1,434,289   

Policy loans

     48,979         48,979         48,979                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 1,302,403       $ 1,483,268       $ 48,979       $       $ 1,434,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

              

Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1)

   $ 766,039       $ 787,947       $       $       $ 787,947   

Funds withheld under reinsurance

     78,707         78,707         78,707                   

Debt

     1,171,005         1,273,705                 1,273,705           

Obligations under securities agreements

     95,973         95,973         95,973                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 2,111,724       $ 2,236,332       $ 174,680       $ 1,273,705       $ 787,947   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
            Fair Value  
     Carrying
Value
     Total      Level 1      Level 2      Level 3  

Financial Assets

              

Commercial mortgage loans on real estate

   $ 1,287,032       $ 1,444,974       $       $       $ 1,444,974   

Policy loans

     51,678         51,678         51,678                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 1,338,710       $ 1,496,652       $ 51,678       $       $ 1,444,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

              

Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1)

   $ 809,628       $ 808,734                       $ 808,734   

Funds withheld under reinsurance

     76,778         76,778         76,778                   

Debt

     1,638,118         1,656,588                 1,656,588           

Obligations under securities agreements

     95,206         95,206         95,206                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 2,619,730       $ 2,637,306       $ 171,984       $ 1,656,588       $ 808,734   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Only the fair value of the Company’s policy reserves for investment-type contracts (those without significant mortality or morbidity risk) are reflected in the table above.

Reinsurance Recoverables Credit Disclosures

A key credit quality indicator for reinsurance is the A.M. Best financial strength ratings of the reinsurer. The A.M. Best ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for new reinsurance agreements where there is material credit exposure are reviewed at the time of execution. The A.M. Best ratings for existing reinsurance agreements are reviewed on a periodic basis, at least annually. The A.M. Best ratings have not changed significantly since December 31, 2013.

An allowance for doubtful accounts for reinsurance recoverables is recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management’s experience and current economic conditions. The Company carries an allowance for doubtful accounts for reinsurance recoverables of $10,820 as of September 30, 2014 and December 31, 2013.

 

28


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

7. Debt

On March 28, 2013, the Company issued two series of senior notes with an aggregate principal amount of $700,000 (the “2013 Senior Notes”). The Company received net proceeds of $698,093 from this transaction, which represents the principal amount less the discount before offering expenses. The discount of $1,907 is being amortized over the life of the 2013 Senior Notes and is included as part of interest expense on the consolidated statements of operations. The first series is $350,000 in principal amount, bears interest at 2.50% per year and is payable in a single installment due March 15, 2018 and was issued at a 0.18% discount. The second series is $350,000 in principal amount, bears interest at 4.00% per year and is payable in a single installment due March 15, 2023 and was issued at a 0.37% discount. Interest on the 2013 Senior Notes is payable semi-annually on March 15 and September 15 of each year. The 2013 Senior Notes are unsecured obligations and rank equally with all of the Company’s other senior unsecured indebtedness. The Company may redeem each series of the 2013 Senior Notes in whole or in part at any time and from time to time before their maturity at the redemption price set forth in the Indenture. The 2013 Senior Notes are registered under the Securities Act of 1933, as amended.

The interest expense incurred related to the 2013 Senior Notes was $5,745 and $5,870 for the three months ended September 30, 2014 and 2013, respectively, and $17,234 and $11,613 for the nine months ended September 30, 2014 and 2013, respectively. There was $948 of accrued interest at both September 30, 2014 and 2013. The Company made interest payments on the 2013 Senior Notes of $11,375 on March 15, 2014 and $11,375 and $10,553 on September 15, 2014 and 2013, respectively.

In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000 (the “2004 Senior Notes”). The Company received proceeds of $971,537 from this transaction, which represents the principal amount less the discount before offering expenses. The discount of $3,463 is being amortized over the life of the 2004 Senior Notes and is included as part of interest expense on the statements of operations. The first series was $500,000 in principal amount, issued at a 0.11% discount, bore interest at 5.63% per year and was repaid on February 18, 2014. The second series is $475,000 in principal amount, bears interest at 6.75% per year and is payable in a single installment due February 15, 2034 and was issued at a 0.61% discount. Interest on the 2004 Senior Notes is payable semi-annually on February 15 and August 15 of each year. The 2004 Senior Notes are unsecured obligations and rank equally with all of the Company’s other senior unsecured indebtedness. The 2004 Senior Notes are not redeemable prior to maturity. All of the holders of the 2004 Senior Notes exchanged their notes in May 2004 for new notes registered under the Securities Act of 1933, as amended.

The interest expense incurred related to the 2004 Senior Notes was $8,031 and $14,714 for the three months ended September 30, 2014 and 2013, respectively, and $27,383 and $44,795 for the nine months ended September 30, 2014 and 2013, respectively. There was $4,008 and $7,523 of accrued interest at September 30, 2014 and 2013, respectively. The Company made interest payments on the 2004 Senior Notes of $30,094 on February 15, 2014 and 2013 and $16,031 and $30,094 on August 15, 2014 and 2013, respectively.

Credit Facility

On September 16, 2014, the Company entered into a five-year unsecured $400,000 revolving credit agreement (the “2014 Credit Facility”) with a syndicate of banks arranged by JP Morgan Chase Bank, N.A. and Wells Fargo, N.A. The 2014 Credit Facility replaces the Company’s prior four-year $350,000 revolving credit facility (the “2011 Credit Facility”), which was entered into on September 21, 2011 and was scheduled to expire in September 2015. The 2011 Credit Facility terminated upon the effectiveness of the 2014 Credit Facility. The 2014 Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and/or letters of credit from a sole issuing bank in an aggregate amount of $400,000 and is available until September 2019, provided the Company is in compliance with all covenants. The 2014 Credit Facility has a sublimit for letters of credit issued thereunder of $50,000. The proceeds of these loans may be used for the Company’s commercial paper program or for general corporate purposes. The Company may increase the total amount available under the 2014 Credit Facility to $525,000 subject to certain conditions. No bank is obligated to provide commitments above their share of the $400,000 facility.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

The Company’s commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the commercial paper program or in an amount sufficient to maintain the ratings assigned to the notes issued from the commercial paper program. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities at their level. This program is currently backed up by a $400,000 senior revolving credit facility, of which $395,740 was available at September 30, 2014, due to $4,260 of outstanding letters of credit related to this program.

The Company did not use the commercial paper program during the nine months ended September 30, 2014 and 2013 and there were no amounts outstanding relating to the commercial paper program at September 30, 2014 and December 31, 2013. The Company made no borrowings using either the 2011 Credit Facility or the 2014 Credit Facility and no loans are outstanding at September 30, 2014.

The 2014 Credit Facility contains restrictive covenants and requires that the Company maintain certain specified minimum ratios and thresholds. Among others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. At September 30, 2014, the Company was in compliance with all covenants, minimum ratios and thresholds.

 

30


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

8. Accumulated Other Comprehensive Income

Certain amounts included in the consolidated statements of comprehensive income are net of reclassification adjustments. The following tables summarize those reclassification adjustments (net of taxes):

 

    Three Months Ended September 30, 2014  
    Foreign
currency
translation
adjustment
    Unrealized
gains on
securities
    OTTI     Pension
under-
funding
    Accumulated
other
comprehensive
income
 

Balance at June 30, 2014

  $ (18,937   $ 837,038      $ 28,811      $ (82,840   $ 764,072   

Other comprehensive loss before reclassifications

    (54,264     (60,219     (1,193            (115,676

Amounts reclassified from accumulated other comprehensive income

           8,602        1,104        1,644        11,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

    (54,264     (51,617     (89     1,644        (104,326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ (73,201   $ 785,421      $ 28,722      $ (81,196   $ 659,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended September 30, 2013  
    Foreign
currency
translation
adjustment
    Unrealized
gains on
securities
    OTTI     Pension
under-
funding
    Accumulated
other
comprehensive
income
 

Balance at June 30, 2013

  $ (27,349   $ 593,630      $ 25,558      $ (171,331   $ 420,508   

Other comprehensive income (loss) before reclassifications

    5,578        (45,212     279               (39,355

Amounts reclassified from accumulated other comprehensive income

           1,907               3,246        5,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    5,578        (43,305     279        3,246        (34,202
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ (21,771   $ 550,325      $ 25,837      $ (168,085   $ 386,306   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine Months Ended September 30, 2014  
    Foreign
currency
translation
adjustment
    Unrealized
gains on
securities
    OTTI     Pension
under-
funding
    Accumulated
other
comprehensive
income
 

Balance at December 31, 2013

  $ (38,767   $ 526,071      $ 26,427      $ (86,901   $ 426,830   

Other comprehensive (loss) income before reclassifications

    (34,434     235,940        1,211               202,717   

Amounts reclassified from accumulated other comprehensive income

           23,410        1,084        5,705        30,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

    (34,434     259,350        2,295        5,705        232,916   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ (73,201   $ 785,421      $ 28,722      $ (81,196   $ 659,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

     Nine Months Ended September 30, 2013  
     Foreign
currency
translation
adjustment
    Unrealized
gains on
securities
    OTTI      Pension
under-
funding
    Accumulated
other
comprehensive
income
 

Balance at December 31, 2012

   $ 6,882      $ 981,879      $ 23,861       $ (182,219   $ 830,403   

Other comprehensive (loss) income before reclassifications

     (28,653     (449,116     1,952                (475,817

Amounts reclassified from accumulated other comprehensive income

            17,562        24         14,134        31,720   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

     (28,653     (431,554     1,976         14,134        (444,097
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ (21,771   $ 550,325      $ 25,837       $ (168,085   $ 386,306   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The following tables summarize the reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013:

 

Details about accumulated other comprehensive

income components

   Amount reclassified  from
accumulated other
comprehensive income
   

Affected line item in the

statement where net

income is presented

     Three Months Ended September 30,      
     2014     2013      

Unrealized gains on securities

   $ 13,234      $ 2,934     

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

     (4,632     (1,027  

Provision for income taxes

  

 

 

   

 

 

   
   $ 8,602      $ 1,907     

Net of tax

  

 

 

   

 

 

   

OTTI

   $ 1,697      $     

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

     (593         

Provision for income taxes

  

 

 

   

 

 

   
   $ 1,104      $     

Net of tax

  

 

 

   

 

 

   

Amortization of pension and postretirement unrecognized net periodic benefit cost:

      

Amortization of prior service cost

   $ (24   $ 12     

(1)

Amortization of net loss

     2,553        4,983     

(1)

  

 

 

   

 

 

   
     2,529        4,995     

Total before tax

     (885     (1,749  

Provision for income taxes

  

 

 

   

 

 

   
   $ 1,644      $ 3,246     

Net of tax

  

 

 

   

 

 

   

Total reclassifications for the period

   $ 11,350      $ 5,153     

Net of tax

  

 

 

   

 

 

   

 

32


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Details about accumulated other comprehensive
income components

   Amount reclassified  from
accumulated other
comprehensive income
   

Affected line item in the

statement where net

income is presented

     Nine Months Ended September 30,      
     2014     2013      

Unrealized gains on securities

   $ 36,015      $ 27,019     

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

     (12,605     (9,457  

Provision for income taxes

  

 

 

   

 

 

   
   $ 23,410      $ 17,562     

Net of tax

  

 

 

   

 

 

   

OTTI

   $ 1,667      $ 37     

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

     (583     (13  

Provision for income taxes

  

 

 

   

 

 

   
   $ 1,084      $ 24     

Net of tax

  

 

 

   

 

 

   

Amortization of pension and postretirement unrecognized net periodic benefit cost:

      

Amortization of prior service cost

   $ (74   $ (88  

(1)

Amortization of net loss

     8,853        21,833     

(1)

  

 

 

   

 

 

   
     8,779        21,745     

Total before tax

     (3,074     (7,611  

Provision for income taxes

  

 

 

   

 

 

   
   $ 5,705      $ 14,134     

Net of tax

  

 

 

   

 

 

   

Total reclassifications for the period

   $ 30,199      $ 31,720     

Net of tax

  

 

 

   

 

 

   

 

(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 12 - Retirement and Other Employee Benefits for additional information.

9. Stock Based Compensation

Long-Term Equity Incentive Plan

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

The Compensation Committee of the Board of Directors (the “Compensation Committee”) awards PSUs and RSUs annually. RSUs and PSUs are promises to issue actual shares of common stock at the end of a vesting period or performance period. The RSUs granted to employees under the ALTEIP were based on salary grade and performance and vest one-third each year over a three-year period. RSUs granted to non-employee directors also vest one-third each year over a three-year period, however, issuance of vested shares is deferred until separation from Board service. RSUs receive dividend equivalents in cash during the restricted period and do not have voting rights during the restricted period. PSUs accrue dividend equivalents during the performance period based on a target payout, and will be paid in cash at the end of the performance period based on the actual number of shares issued. The fair value of RSUs is estimated using the fair market value of a share of the Company’s common stock at the date of grant. The fair value of PSUs is estimated using the Monte Carlo simulation model and is described in further detail below.

For the PSU portion of an award, the number of shares a participant will receive upon vesting is contingent upon the Company’s performance with respect to selected metrics, identified below, compared against a broad index of insurance companies and assigned a percentile ranking. These rankings are then averaged to determine the composite percentile ranking for the performance period. The payout levels can vary between 0% and 150% (maximum) of the target (100%) ALTEIP award amount based on the Company’s level of performance against the selected metrics.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

PSU Performance Goals. The Compensation Committee established book value per share (“BVPS”) growth excluding AOCI, revenue growth and total stockholder return as the three performance measures for PSU awards. BVPS growth is defined as the year-over-year growth of the Company’s stockholders’ equity excluding AOCI divided by the number of fully diluted total shares outstanding at the end of the period. Revenue growth is defined as the year-over-year change in total revenues as disclosed in the Company’s annual statement of operations. Total stockholder return is defined as appreciation in Company stock plus dividend yield to stockholders. Payouts will be determined by measuring performance against the average performance of companies included in an insurance industry market index.

Since 2009, the Company has used the A.M. Best U.S. Insurance Index to measure its relative performance ranking. In 2014, A.M. Best stopped publishing this index. As of January 1, 2014, the Company is using the S&P Total Market Index to measure the Company’s performance for all new and outstanding PSU awards. Consistent with adjustments made to the A.M. Best U.S. Insurance Index, adjustments will be made to the S&P Total Market Index to exclude companies with revenues of less than $1,000,000 or that are not in the insurance or managed healthcare Global Industry Classification Standard codes. In addition, companies within the Company’s compensation peer group, but not otherwise in the S&P Total Market Index, will be included. The adjusted S&P Total Market Index is substantially similar in composition to the previous A.M. Best U.S. Insurance Index.

Under the ALTEIP, the Company’s Chief Executive Officer (“CEO”) is authorized by the Board of Directors to grant common stock, restricted stock and RSUs to employees other than the executive officers of the Company (as defined in Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). The Board of Directors reviews and ratifies these grants quarterly. Restricted stock and RSUs granted under this program may have different vesting periods.

Restricted Stock Units

RSUs granted to employees and to non-employee directors were 27,347 and 14,916 for the three months ended September 30, 2014 and 2013, respectively, and 358,611 and 481,134 for the nine months ended September 30, 2014 and 2013, respectively. The compensation expense recorded related to RSUs was $6,197 and $6,936 for the three months ended September 30, 2014 and 2013, respectively, and $17,174 and $19,207 for the nine months ended September 30, 2014 and 2013, respectively. The related total income tax benefit was $2,167 and $2,425 for the three months ended September 30, 2014 and 2013, respectively, and $6,001 and $6,714 for the nine months ended September 30, 2014 and 2013, respectively. The weighted average grant date fair value for RSUs granted during the nine months ended September 30, 2014 and 2013 was $65.32 and $44.18, respectively.

As of September 30, 2014, there was $19,197 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.16 years. The total fair value of RSUs vested during the three months ended September 30, 2014 and 2013 was $1,473 and $982, respectively, and $32,354 and $20,832 for the nine months ended September 30, 2014 and 2013, respectively.

Performance Share Units

No PSUs were granted to employees during the three months ended September 30, 2014 and 2013. PSUs granted to employees were 380,349 and 408,808 for the nine months ended September 30, 2014 and 2013, respectively. The compensation expense recorded related to PSUs was $3,460 and $7,839 for the three months ended September 30, 2014 and 2013, respectively, and $17,022 and $16,688 for the nine months ended September 30, 2014 and 2013, respectively. The related total income tax benefit was $1,206 and $2,738 for the three months ended September 30, 2014 and 2013, respectively, and $5,942 and $5,832 for the nine months ended September 30, 2014 and 2013, respectively. The weighted average grant date fair value for PSUs granted during the nine months ended September 30, 2014 and 2013 was $64.93 and $44.22, respectively.

As of September 30, 2014, there was $23,107 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 0.87 years.

The fair value of PSUs with market conditions was estimated on the date of grant using a Monte Carlo simulation model, which utilizes multiple variables that determine the probability of satisfying the market condition stipulated in the award. Expected volatilities for awards issued during the nine months ended September 30, 2014 and 2013 were based on the historical stock prices of the Company’s stock and peer insurance group. The expected term for grants issued during the nine months ended September 30, 2014 and 2013 was assumed to equal the average of the vesting period of the PSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase shares at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period.

In January 2014, the Company issued 75,709 shares at a discounted price of $46.36 for the offering period of July 1, 2013 through December 31, 2013. In January 2013, the Company issued 107,535 shares at a discounted price of $31.23 for the offering period of July 1, 2012 through December 31, 2012.

In July 2014, the Company issued 65,867 shares at a discounted price of $58.79 for the offering period of January 1, 2014 through June 30, 2014. In July 2013, the Company issued 110,038 shares at a discounted price of $31.93 for the offering period of January 1, 2013 through June 30, 2013.

The compensation expense recorded related to the ESPP was $308 and $300 for the three months ended September 30, 2014 and 2013, respectively, and $893 and $798 for the nine months ended 2014 and 2013, respectively.

The fair value of each award under the ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current annualized dividend and share price as of the grant date.

10. Stock Repurchase

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

 

Period in 2014

   Number of
Shares Repurchased
     Average Price
Paid Per Share
     Total Number of  Shares
Repurchased as Part of
Publicly Announced
Programs
 

January

     314,600       $ 66.56         314,600   

February

                       

March

                       

April

     302,000         65.54         302,000   

May

     292,000         67.22         292,000   

June

     283,000         67.68         283,000   

July

                       

August

     386,000         65.07         386,000   

September

     186,000         65.00         186,000   
  

 

 

       

 

 

 

Total

     1,763,600       $ 66.18         1,763,600   
  

 

 

       

 

 

 

On November 18, 2013, the Company’s Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock, making the total remaining under the total repurchase authorization $752,436 as of that date.

As of December 31, 2013, there was $704,874 remaining under the total repurchase authorization. During the nine months ended September 30, 2014, the Company repurchased 1,763,600 shares of the Company’s outstanding common stock at a cost of $116,686, exclusive of commissions, leaving $588,188 remaining under the total repurchase authorization at September 30, 2014.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

11. Earnings Per Common Share

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Numerator

        

Net income

   $ 140,297      $ 128,788      $ 421,152      $ 380,091   

Deduct dividends paid

     (19,449     (18,833     (58,382     (55,777
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings

   $ 120,848      $ 109,955      $ 362,770      $ 324,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted average shares outstanding used in basic earnings per share

     72,182,547        75,544,542        72,561,191        77,662,796   

Incremental common shares from:

        

SARs

            53,172               73,307   

PSUs

     864,157        859,572        866,171        823,393   

ESPPs

            2,505               2,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in diluted earnings per share calculations

     73,046,704        76,459,791        73,427,362        78,562,001   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - Basic

        

Distributed earnings

   $ 0.27      $ 0.25      $ 0.79      $ 0.71   

Undistributed earnings

     1.67        1.45        5.01        4.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1.94      $ 1.70      $ 5.80      $ 4.89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share - Diluted

        

Distributed earnings

   $ 0.27      $ 0.25      $ 0.79      $ 0.71   

Undistributed earnings

     1.65        1.43        4.95        4.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1.92      $ 1.68      $ 5.74      $ 4.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no anti-dilutive SARs or PSUs outstanding that were not included in the computation of diluted EPS under the treasury stock method during the three and nine months ended September 30, 2014 and 2013.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2014 and 2013

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

 

 

12. Retirement and Other Employee Benefits

The components of net periodic benefit cost for the Company’s qualified pension benefits plan, nonqualified pension benefits plan and retirement health benefits plan for the three and nine months ended September 30, 2014 and 2013 were as follows:

 

     Qualified Pension
Benefits
    Nonqualified  Pension
Benefits (1)
     Retirement  Health
Benefits
 
     For the Three Months
Ended September 30,
    For the Three  Months
Ended September 30,
     For the Three Months
Ended September 30,
 
     2014     2013     2014      2013      2014     2013  

Service cost

   $ 7,966      $ 7,832      $ 1,139       $ 1,008       $ 494      $ 581   

Interest cost

     9,521        8,867        1,636         1,480         9