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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 March 31, 2015
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.)
28 Liberty Street, 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 April 30, 2015 was 67,916,445.
 
 
 
 
 




ASSURANT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
TABLE OF CONTENTS
 
Item
Number
 
Page
Number
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
6.
 
 
 
 
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



Assurant, Inc.
Consolidated Balance Sheets (unaudited)
At March 31, 2015 and December 31, 2014
 
 
 



 
March 31, 2015
 
December 31, 2014
 
(in thousands except number of shares and per
share amounts)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities available for sale, at fair value (amortized cost - $10,019,473 in 2015 and
   $10,048,100 in 2014)
$
11,387,311

 
$
11,263,174

Equity securities available for sale, at fair value (cost - $456,697 in 2015 and $434,875 in 2014)
530,509

 
499,407

Commercial mortgage loans on real estate, at amortized cost
1,255,459

 
1,272,616

Policy loans
46,555

 
48,272

Short-term investments
247,525

 
345,246

Collateral held/pledged under securities agreements
93,242

 
95,985

Other investments
611,927

 
606,752

Total investments
14,172,528

 
14,131,452

Cash and cash equivalents
1,065,165

 
1,318,656

Premiums and accounts receivable, net
1,573,984

 
1,445,630

Reinsurance recoverables
7,205,284

 
7,254,585

Accrued investment income
144,591

 
138,868

Deferred acquisition costs
2,827,411

 
2,957,740

Property and equipment, at cost less accumulated depreciation
286,186

 
277,645

Tax receivable

 
15,132

Goodwill
828,564

 
841,239

Value of business acquired
43,457

 
45,462

Other intangible assets, net
331,338

 
381,960

Other assets
388,190

 
847,860

Assets held in separate accounts
1,933,658

 
1,906,237

Total assets
$
30,800,356

 
$
31,562,466

Liabilities
 
 
 
Future policy benefits and expenses
$
9,417,564

 
$
9,483,672

Unearned premiums
6,259,389

 
6,529,675

Claims and benefits payable
3,784,275

 
3,698,606

Commissions payable
451,238

 
487,322

Reinsurance balances payable
104,566

 
157,089

Funds held under reinsurance
87,146

 
75,161

Deferred gain on disposal of businesses
97,559

 
100,817

Obligation under securities agreements
93,241

 
95,986

Accounts payable and other liabilities
2,241,162

 
2,675,515

Tax payable
31,193

 

Debt
1,171,153

 
1,171,079

Liabilities related to separate accounts
1,933,658

 
1,906,237

Total liabilities
25,672,144

 
26,381,159

Commitments and contingencies (Note 14)

 

Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 68,270,067 and 69,299,559
   shares outstanding at March 31, 2015 and December 31, 2014, respectively
1,493

 
1,490

Additional paid-in capital
3,135,397

 
3,131,274

Retained earnings
4,840,497

 
4,809,287

Accumulated other comprehensive income
548,997

 
555,767

Treasury stock, at cost; 80,632,242 and 79,338,142 shares at March 31, 2015 and December 31, 2014,
   respectively
(3,398,172
)
 
(3,316,511
)
Total stockholders’ equity
5,128,212

 
5,181,307

Total liabilities and stockholders’ equity
$
30,800,356

 
$
31,562,466


See the accompanying notes to the consolidated financial statements

2



Assurant, Inc.
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2015 and 2014
 
 
 

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands except number of shares and per share amounts)
Revenues
 
 
 
Net earned premiums
$
2,159,562

 
$
2,060,462

Net investment income
152,273

 
168,058

Net realized gains on investments, excluding other-than-temporary impairment losses
6,525

 
19,751

Total other-than-temporary impairment losses
(3,208
)
 
(29
)
Portion of net loss recognized in other comprehensive income, before taxes
638

 
29

Net other-than-temporary impairment losses recognized in earnings
(2,570
)
 

Amortization of deferred gain on disposal of businesses
3,258

 
3,660

Fees and other income
279,562

 
196,441

Total revenues
2,598,610

 
2,448,372

Benefits, losses and expenses
 
 
 
Policyholder benefits
1,210,727

 
1,008,032

Amortization of deferred acquisition costs and value of business acquired
369,003

 
344,782

Underwriting, general and administrative expenses
921,909

 
843,240

Interest expense
13,778

 
17,065

Total benefits, losses and expenses
2,515,417

 
2,213,119

Income before provision for income taxes
83,193

 
235,253

Provision for income taxes
33,149

 
98,008

Net income
$
50,044

 
$
137,245

Earnings Per Share
 
 
 
Basic
$
0.72

 
$
1.88

Diluted
$
0.71

 
$
1.86

Dividends per share
$
0.27

 
$
0.25

Share Data
 
 
 
Weighted average shares outstanding used in basic per share calculations
69,770,224

 
72,848,756

Plus: Dilutive securities
987,325

 
1,025,196

Weighted average shares used in diluted per share calculations
70,757,549

 
73,873,952

See the accompanying notes to the consolidated financial statements

3



Assurant, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended March 31, 2015 and 2014
 
 
 

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
Net income
$
50,044

 
$
137,245

Other comprehensive (loss) income:
 
 
 
Change in unrealized gains on securities, net of taxes of $(28,349) and $(86,876),
   respectively
57,459

 
171,033

Change in other-than-temporary impairment gains, net of taxes of $481 and $(883),
   respectively
(894
)
 
1,640

Change in foreign currency translation, net of taxes of $2,654 and $3,341, respectively
(65,951
)
 
(18,053
)
Amortization of pension and postretirement unrecognized net periodic benefit cost, net
   of taxes of $(1,409) and $(1,094), respectively
2,616

 
2,031

Total other comprehensive (loss) income
(6,770
)
 
156,651

Total comprehensive income
$
43,274

 
$
293,896

See the accompanying notes to the consolidated financial statements

4



Assurant, Inc.
Consolidated Statement of Stockholders’ Equity (unaudited)
From December 31, 2014 through March 31, 2015
 
 
 

 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Total
 
(in thousands)
Balance at December 31, 2014
$
1,490

 
$
3,131,274

 
$
4,809,287

 
$
555,767

 
$
(3,316,511
)
 
$
5,181,307

Stock plan exercises
3

 
(3,326
)
 

 

 

 
(3,323
)
Stock plan compensation
  expense

 
5,890

 

 

 

 
5,890

Change in tax benefit from
  share-based payment
  arrangements

 
1,559

 

 

 

 
1,559

Dividends

 

 
(18,834
)
 

 

 
(18,834
)
Acquisition of common
  stock

 

 

 

 
(81,661
)
 
(81,661
)
Net income

 

 
50,044

 

 

 
50,044

Other comprehensive
 loss

 

 

 
(6,770
)
 

 
(6,770
)
Balance, March 31, 2015
$
1,493

 
$
3,135,397

 
$
4,840,497

 
$
548,997

 
$
(3,398,172
)
 
$
5,128,212

 
See the accompanying notes to the consolidated financial statements

5



Assurant, Inc.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2015 and 2014
 
 
 

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
Net cash (used in) provided by operating activities
$
(177,666
)
 
$
127,178

Investing activities
 
 
 
Sales of:
 
 
 
Fixed maturity securities available for sale
452,944

 
461,894

Equity securities available for sale
14,660

 
64,223

Other invested assets
6,685

 
22,764

Property and equipment and other
10

 

Subsidiary, net of cash transferred (3)
65,002

 

Maturities, calls, prepayments, and scheduled redemption of:
 
 
 
Fixed maturity securities available for sale
179,339

 
214,058

Commercial mortgage loans on real estate
45,887

 
50,498

Purchases of:
 
 
 
Fixed maturity securities available for sale
(708,069
)
 
(791,994
)
Equity securities available for sale
(37,886
)
 
(48,822
)
Commercial mortgage loans on real estate
(36,180
)
 
(23,050
)
Other invested assets
(5,303
)
 
(7,959
)
Property and equipment and other
(22,157
)
 
(13,105
)
Equity interest (1)
(457
)
 
(20,950
)
Change in short-term investments
95,250

 
(99,008
)
Change in policy loans
1,544

 
1,105

Change in collateral held/pledged under securities agreements
2,746

 
(791
)
Net cash provided by (used in) investing activities
54,015

 
(191,137
)
Financing activities
 
 
 
Repayment of debt

 
(467,330
)
Change in tax benefit from share-based payment arrangements
1,559

 
8,509

Acquisition of common stock
(84,329
)
 
(26,107
)
Dividends paid
(18,834
)
 
(18,180
)
Payment of contingent obligations (2)

 
(31,871
)
Change in obligation under securities agreements
(2,746
)
 
791

Net cash used in financing activities
(104,350
)
 
(534,188
)
Effect of exchange rate changes on cash and cash equivalents
(22,277
)
 
(13,125
)
Cash included in held for sale assets
(3,213
)
 

Change in cash and cash equivalents
(253,491
)
 
(611,272
)
Cash and cash equivalents at beginning of period
1,318,656

 
1,717,184

Cash and cash equivalents at end of period
$
1,065,165

 
$
1,105,912

 
(1)
Relates to the purchase of equity interest in Iké Asistencia.
(2)
Relates to the delayed and contingent liability payments established at the time of acquisition of Lifestyle Services Group.
(3)
Relates to the sale of American Reliable Insurance Company to Global Indemnity Group, Inc., in January 2015.
See the accompanying notes to the consolidated financial statements

6

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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 specialty protection 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 products and services; debt protection administration; credit-related insurance; warranties and extended service products and related services for consumer electronics, appliances and vehicles; pre-funded funeral insurance; lender-placed homeowners insurance; property, appraisal, preservation and valuation services; flood insurance; 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 March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for 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 require the Company to record amounts to our consolidated financial statements based on assumptions and estimates that could materially change as experience develops.
Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014.
3. Recent Accounting Pronouncements
Not Yet Adopted
In April 2015, the Financial Accounting Standards Board (“FASB”) issued amended guidance on presentation of debt issuance costs. This amended guidance requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected by the amendments. The amended guidance is effective for interim and annual periods beginning after December 15, 2015. Therefore, the Company is required to adopt the guidance on January 1, 2016. Early adoption of the amended guidance is permitted for financial statements that have not been previously issued. An entity should apply the amended guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company does not expect the adoption of this presentation guidance to impact the Company’s financial position or results of operations.

7

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




In February 2015, the FASB issued new consolidation guidance that affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for interim and annual periods beginning after December 15, 2015. Therefore, the Company is required to adopt the guidance on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The new guidance may be applied retrospectively or through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is evaluating the requirements of this new consolidation guidance and the potential impact on the Company’s financial position and results of operations.
In May 2014, the 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 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. Dispositions
In January 2015, the Company completed the sale of its general agency business and primary insurance carrier, American Reliable Insurance Company (“ARIC”), to Global Indemnity Group, Inc., a subsidiary of Global Indemnity plc, for $117,860 in net cash consideration. The business was part of the Assurant Specialty Property segment and offers specialty personal lines and agricultural insurance through general and independent agents. The sale price was based on the GAAP book value of the business from June 30, 2014 adjusted as of January 1, 2015. In accordance with held for sale accounting, the Company recorded a loss of $21,526 for the period ended December 31, 2014. Upon final settlement, the Company recorded a gain of $5,284 for the quarter ended March 31, 2015, which is classified in underwriting, general and administrative expenses on the Consolidated Statements of Operations.

8

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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: 
 
March 31, 2015
 
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
$
179,565

 
$
6,068

 
$
(49
)
 
$
185,584

 
$

States, municipalities and political
  subdivisions
699,664

 
67,263

 
(483
)
 
766,444

 

Foreign governments
519,059

 
96,260

 
(1,327
)
 
613,992

 

Asset-backed
3,775

 
1,634

 
(116
)
 
5,293

 
1,526

Commercial mortgage-backed
34,375

 
1,043

 

 
35,418

 

Residential mortgage-backed
973,193

 
69,758

 
(479
)
 
1,042,472

 
16,117

Corporate
7,609,842

 
1,137,179

 
(8,913
)
 
8,738,108

 
21,897

Total fixed maturity securities
$
10,019,473

 
$
1,379,205

 
$
(11,367
)
 
$
11,387,311

 
$
39,540

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
21,984

 
$
16,834

 
$

 
$
38,818

 
$

Non-redeemable preferred stocks
434,713

 
58,171

 
(1,193
)
 
491,691

 

Total equity securities
$
456,697

 
$
75,005

 
$
(1,193
)
 
$
530,509

 
$

 
 
December 31, 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
$
172,070

 
$
5,201

 
$
(429
)
 
$
176,842

 
$

States, municipalities and political
  subdivisions
703,167

 
67,027

 
(353
)
 
769,841

 

Foreign governments
591,981

 
74,339

 
(1,457
)
 
664,863

 

Asset-backed
3,917

 
1,680

 
(78
)
 
5,519

 
1,570

Commercial mortgage-backed
44,907

 
1,109

 

 
46,016

 

Residential mortgage-backed
911,004

 
58,876

 
(1,154
)
 
968,726

 
17,732

Corporate
7,621,054

 
1,026,927

 
(16,614
)
 
8,631,367

 
21,612

Total fixed maturity securities
$
10,048,100

 
$
1,235,159

 
$
(20,085
)
 
$
11,263,174

 
$
40,914

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
22,300

 
$
15,651

 
$
(1
)
 
$
37,950

 
$

Non-redeemable preferred stocks
412,575

 
50,975

 
(2,093
)
 
461,457

 

Total equity securities
$
434,875

 
$
66,626

 
$
(2,094
)
 
$
499,407

 
$

 

(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.
 

9

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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 March 31, 2015 and December 31, 2014. At March 31, 2015 and December 31, 2014, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $326,676 and $270,107, 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 March 31, 2015 and December 31, 2014, revenue bonds account for 51% of the holdings. 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 March 31, 2015, approximately 79%, 7% 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, 2014, approximately 76%, 10% and 5% 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 2% and 3% of our foreign government securities as of March 31, 2015 and December 31, 2014, respectively.
The Company has European investment exposure in its corporate fixed maturity and equity securities of $1,065,643 with a net unrealized gain of $135,396 at March 31, 2015 and $1,060,655 with a net unrealized gain of $116,975 at December 31, 2014. Approximately 21% and 22% of the corporate European exposure is held in the financial industry at March 31, 2015 and December 31, 2014, respectively. Our largest European country exposure represented approximately 5% of the fair value of our corporate securities as of March 31, 2015 and December 31, 2014. Approximately 5% of the fair value of the corporate European securities are pound and euro-denominated and are not hedged to U.S. dollars, but held to support those foreign-denominated liabilities. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification.
The Company has exposure to the energy sector in its corporate fixed maturity securities of $1,000,301 with a net unrealized gain of $104,360 at March 31, 2015 and $992,012 with a net unrealized gain of $89,590 at December 31, 2014. Approximately 87% and 89% of the energy exposure is rated as investment grade as of March 31, 2015 and December 31, 2014, respectively.
The cost or amortized cost and fair value of fixed maturity securities at March 31, 2015 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
$
295,436

 
$
300,908

Due after one year through five years
2,193,375

 
2,327,168

Due after five years through ten years
2,410,792

 
2,575,843

Due after ten years
4,108,527

 
5,100,209

Total
9,008,130

 
10,304,128

Asset-backed
3,775

 
5,293

Commercial mortgage-backed
34,375

 
35,418

Residential mortgage-backed
973,193

 
1,042,472

Total
$
10,019,473

 
$
11,387,311



10

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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 
 March 31,
 
2015
 
2014
Proceeds from sales
$
552,513

 
$
552,999

Gross realized gains
12,343

 
22,783

Gross realized losses
5,599

 
5,267

The following table sets forth the net realized gains, including OTTI, recognized in the statement of operations as follows: 
 
Three Months Ended 
 March 31,
 
2015
 
2014
Net realized gains related to sales and other:
 
 
 
Fixed maturity securities
$
5,513

 
$
15,190

Equity securities
874

 
5,124

Other investments
138

 
(563
)
Total net realized gains related to sales and other
6,525

 
19,751

Net realized losses related to other-than-temporary impairments:
 
 
 
Fixed maturity securities
(2,570
)
 

Total net realized losses related to other-than-temporary impairments
(2,570
)
 

Total net realized gains
$
3,955

 
$
19,751

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.
For the three months ended March 31, 2015, the Company recorded $3,208 of OTTI, of which $2,570 was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $638 related to all other factors and recorded as an unrealized loss component of AOCI. For the three months ended March 31, 2014, the Company recorded $29 of OTTI, all of which was related to non-credit factors and recorded as an unrealized loss component of AOCI.

11

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




The following table sets 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 March 31,
 
2015
 
2014
Balance, January 1,
$
35,424

 
$
45,278

Additions for credit loss impairments recognized in the current period on securities not
  previously impaired
2,570

 

Reductions for increases in cash flows expected to be collected that are recognized over
  the remaining life of the security
(472
)
 
(482
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(1,465
)
 
(495
)
Balance, March 31,
$
36,057

 
$
44,301

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are timely identified, 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.
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 March 31, 2015 and December 31, 2014 were as follows:

12

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




 
March 31, 2015
 
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
$
11,159

 
$
(10
)
 
$
8,579

 
$
(39
)
 
$
19,738

 
$
(49
)
States, municipalities and political
  subdivisions
4,688

 
(20
)
 
2,870

 
(463
)
 
7,558

 
(483
)
Foreign governments
9,611

 
(176
)
 
26,279

 
(1,151
)
 
35,890

 
(1,327
)
Asset-backed

 

 
1,246

 
(116
)
 
1,246

 
(116
)
Residential mortgage-backed
45,587

 
(177
)
 
17,290

 
(302
)
 
62,877

 
(479
)
Corporate
402,717

 
(6,893
)
 
29,596

 
(2,020
)
 
432,313

 
(8,913
)
Total fixed maturity securities
$
473,762

 
$
(7,276
)
 
$
85,860

 
$
(4,091
)
 
$
559,622

 
$
(11,367
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
28,234

 
$
(230
)
 
$
19,860

 
$
(963
)
 
$
48,094

 
$
(1,193
)
 
 
December 31, 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
$
34,551

 
$
(188
)
 
$
21,488

 
$
(241
)
 
$
56,039

 
$
(429
)
States, municipalities and political
  subdivisions
3,050

 
(282
)
 
4,633

 
(71
)
 
7,683

 
(353
)
Foreign governments
19,886

 
(67
)
 
37,741

 
(1,390
)
 
57,627

 
(1,457
)
Asset-backed

 

 
1,348

 
(78
)
 
1,348

 
(78
)
Residential mortgage-backed
22,337

 
(71
)
 
61,682

 
(1,083
)
 
84,019

 
(1,154
)
Corporate
640,641

 
(13,132
)
 
113,918

 
(3,482
)
 
754,559

 
(16,614
)
Total fixed maturity securities
$
720,465

 
$
(13,740
)
 
$
240,810

 
$
(6,345
)
 
$
961,275

 
$
(20,085
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$

 
$

 
$
196

 
$
(1
)
 
$
196

 
$
(1
)
Non-redeemable preferred stocks
8,844

 
(264
)
 
24,784

 
(1,829
)
 
33,628

 
(2,093
)
Total equity securities
$
8,844

 
$
(264
)
 
$
24,980

 
$
(1,830
)
 
$
33,824

 
$
(2,094
)

13

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




Total gross unrealized losses represent approximately 2% of the aggregate fair value of the related securities at March 31, 2015 and December 31, 2014. Approximately 60% and 63% of these gross unrealized losses have been in a continuous loss position for less than twelve months at March 31, 2015 and December 31, 2014, respectively. The total gross unrealized losses are comprised of 238 and 385 individual securities at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. As of March 31, 2015, 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 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 $1,795, or 89%, 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 March 31, 2015, 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 March 31, 2015, 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 March 31, 2015, 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 range in size from $50 to $15,091 at March 31, 2015 and from $77 to $15,190 at December 31, 2014.
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.
 

14

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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:
 
March 31, 2015
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
1,157,193

 
91.9
%
 
1.97

71 – 80%
67,900

 
5.4
%
 
1.26

81 – 95%
27,234

 
2.2
%
 
1.04

Greater than 95%
6,531

 
0.5
%
 
0.43

Gross commercial mortgage loans
1,258,858

 
100
%
 
1.91

Less valuation allowance
(3,399
)
 
 
 
 
Net commercial mortgage loans
$
1,255,459

 
 
 
 
 
 
December 31, 2014
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
1,168,454

 
91.6
%
 
2.01

71 – 80%
73,762

 
5.8
%
 
1.26

81 – 95%
27,268

 
2.1
%
 
1.04

Greater than 95%
6,531

 
0.5
%
 
0.43

Gross commercial mortgage loans
1,276,015

 
100
%
 
1.94

Less valuation allowance
(3,399
)
 
 
 
 
Net commercial mortgage loans
$
1,272,616

 
 
 
 
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 lends fixed maturity securities, primarily bonds issued by the U.S. government and government agencies and authorities, and U.S. corporations, to selected broker/dealers. All such loans are negotiated on an overnight basis; term loans are not permitted. The Company receives collateral, greater than or equal to 102% of the fair value of the securities lent, plus accrued interest, 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 on the re-investment of cash collateral. The Company's investment portfolio is readily marketable and convertible to cash sufficient to provide for short term needs related to the securities lending transactions.
As of March 31, 2015 and December 31, 2014, our collateral held under securities lending agreements, of which its use is unrestricted, was $93,242 and $95,985, 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 $93,241 and $95,986, respectively, and is included in the consolidated balance sheets under the 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. All securities were in an unrealized gain position as of March 31, 2015. All securities with unrealized losses have

15

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




been in a continuous loss position for less than 12 months as of December 31, 2014. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments. 
As of March 31, 2015, 98% of the obligation under securities agreements is invested in corporate fixed maturities, money market funds and daily repurchase agreements with a remaining contractual maturity of one year or less.  
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 takes into account 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.
We review fair value hierarchy classifications 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.
 

16

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. 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 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. 
 
March 31, 2015
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
United States Government and government agencies
  and authorities
$
185,584

 
$

  
 
$
185,584

  
 
$

  
State, municipalities and political subdivisions
766,444

 

  
 
766,444

  
 

  
Foreign governments
613,992

 
937

  
 
613,055

  
 

  
Asset-backed
5,293

 

  
 
5,293

  
 

  
Commercial mortgage-backed
35,418

 

  
 
35,064

  
 
354

  
Residential mortgage-backed
1,042,472

 

  
 
1,042,472

  
 

  
Corporate
8,738,108

 

  
 
8,637,118

  
 
100,990

  
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
38,818

 
38,135

  
 
683

  
 

  
Non-redeemable preferred stocks
491,691

 

  
 
489,631

  
 
2,060

  
Short-term investments
247,525

 
156,907

 
90,618

 

  
Collateral held/pledged under securities agreements
73,242

 
68,040

 
5,202

 

  
Other investments
277,948

 
71,306

 
204,182

 
2,460

Cash equivalents
596,285

 
594,880

 
1,405

 

  
Other assets
1,633

 

  
 
689

 
944

Assets held in separate accounts
1,882,913

 
1,717,771

 
165,142

 

  
Total financial assets
$
14,997,366

 
$
2,647,976

  
 
$
12,242,582

  
 
$
106,808

  
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
92,994

 
$
66,778

 
$
35

 
$
26,181

Liabilities related to separate accounts
1,882,913

 
1,717,771

 
165,142

 

   
Total financial liabilities
$
1,975,907

 
$
1,784,549

  
 
$
165,177

   
 
$
26,181

   

 
 

17

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




 
December 31, 2014
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
United States Government and government agencies
  and authorities
$
176,842

 
$

 
 
$
176,842

 
 
$

 
State, municipalities and political subdivisions
769,841

 

 
 
769,841

 
 

 
Foreign governments
664,863

 
757

 
 
664,106

 
 

 
Asset-backed
5,519

 

 
 
5,519

 
 

 
Commercial mortgage-backed
46,016

 

 
 
45,613

 
 
403

 
Residential mortgage-backed
968,726

 

 
 
964,081

 
 
4,645

 
Corporate
8,631,367

 

 
 
8,527,092

 
 
104,275

 
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
37,950

 
37,266

 
 
684

 
 

 
Non-redeemable preferred stocks
461,457

 

 
 
459,457

 
 
2,000

 
Short-term investments
345,246

 
266,980

 
78,266

 

 
Collateral held/pledged under securities agreements
74,985

 
67,783

 
7,202

 

 
Other investments
272,755

 
59,358

 
211,276

 
2,121

Cash equivalents
683,142

 
635,804

 
47,338

 

 
Other assets
1,674

 

  
 
867

 
807

Assets held in separate accounts
1,854,193

 
1,682,671

 
171,522

 

 
Total financial assets
$
14,994,576

 
$
2,750,619

 
 
$
12,129,706

 
 
$
114,251

 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
84,660

 
$
59,358

 
$
69

f
 
$
25,233

Liabilities related to separate accounts
1,854,193

 
1,682,671

 
171,522

 

 
Total financial liabilities
$
1,938,853

 
$
1,742,029

 
 
$
171,591

 
 
$
25,233

 
 

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.
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.

18

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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 months ended March 31, 2015 and 2014: 
 
Three Months Ended March 31, 2015
 
Balance,
beginning 
of
period
 
Total
 (losses) gains
(realized/
unrealized)
included in
earnings (1)
 
Net unrealized
gains (losses) 
included in
other
comprehensive
income (2)
 
Sales
 
Transfers
in (3)
 
Transfers
out (3)
 
Balance,
end of
period
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
403

 
$

 
$
(3
)
 
$
(46
)
 
$

 
$

 
$
354

Residential mortgage-backed
4,645

 

 

 

 

 
(4,645
)
 

Corporate
104,275

 
(8
)
 
880

 
(2,155
)
 
2,130

 
(4,132
)
 
100,990

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
2,000

 

 
60

 

 

 

 
2,060

  Other investments
2,121

 
128

 
(4
)
 
(21
)
 
236

 

 
2,460

  Other assets
807

 
137

 

 

 

 

 
944

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other liabilities
(25,233
)
 
(948
)
 

 

 

 

 
(26,181
)
Total level 3 assets and liabilities
$
89,018

 
$
(691
)
 
$
933

 
$
(2,222
)
 
$
2,366

 
$
(8,777
)
 
$
80,627

 

  
Three Months Ended March 31, 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

 

 
(5
)
 

 
(43
)
 

 

 
550

Residential mortgage-
  backed
4,167

 

 

 

 

 

 
(4,167
)
 

Corporate
115,344

 
98

 
3,206

 

 
(3,079
)
 

 
(7,356
)
 
108,213

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred
  stocks
7,510

 
328

 
(294
)
 

 
(1,830
)
 

 

 
5,714

  Other investments
4,171

 
(1,095
)
 
4

 

 
(20
)
 

 

 
3,060

  Other assets
2,491

 
(191
)
 

 

 

 

 

 
2,300

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other liabilities
(20,330
)
 
1,285

 

 
(4,000
)
 

 

 

 
(23,045
)
Total level 3 assets and
  liabilities
$
153,465

 
$
423

 
$
2,929

 
$
(4,000
)
 
$
(4,972
)
 
$

 
$
(34,180
)
 
$
113,665


(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.

19

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




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, the Company uses valuation techniques consistent with the market approach including matrix pricing and comparables. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but, rather, relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.
Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques and the multi-period excess earnings method. 
Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
While not all three approaches are applicable to all financial assets or liabilities, where appropriate, the Company may use one or more valuation techniques. 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 Company generally uses the market valuation technique. For certain privately placed corporate bonds, the CPI Caps and certain derivatives, we generally use the income valuation technique. For the periods ended March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, 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 values Level 2 securities 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 Company uses the following observable market inputs (“standard inputs”), listed in the approximate order of priority, 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 using 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 using 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 using monthly payment information and collateral

20

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




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 using standard inputs. Non-investment grade securities within this category are priced by our pricing service using 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 using observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.
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.
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 March 31, 2015 and December 31, 2014 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, $62,605 and $63,614 were priced by a pricing service using single broker quotes due to insufficient information to provide an evaluated price as of March 31, 2015 and December 31, 2014, 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 $41,225 and $47,923 were priced internally using independent and non-binding broker quotes as of March 31, 2015 and December 31, 2014, 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: The Company prices swaptions using a Black-Scholes pricing model incorporating third-party market data, including swap volatility data. The Company prices credit default swaps 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. 

21

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets.
The Company generally obtains one price for each financial asset. The Company performs a monthly analysis to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize our financial assets in the fair value hierarchy.
For the net option, the Company performs a periodic analysis to assess if the evaluated price represents a reasonable estimate of the fair value for the financial liability. This process involves quantitative and qualitative analysis overseen by finance and accounting professionals. Examples of procedures 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 uses both the income and market valuation approaches to measure the fair value of its reporting units when required. Under the income approach, the Company determines the fair value of the reporting units considering distributable earnings, which are estimated from operating plans. The resulting cash flows are 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 estimates the terminal value attributable to the years beyond the discrete operating plan period. The discounted terminal value is then added to the aggregate discounted distributable earnings from the discrete operating plan period to estimate the fair value of the reporting units. Under the market approach, the Company derives 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 2015 earnings, which are estimated based on publicly available data related to comparable guideline companies. In addition, the Company also estimates financial multiples from publicly available purchase price data for acquisitions of companies operating in the insurance industry. The estimated fair value of the reporting units is more heavily weighted towards the income approach because 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, 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
Collateral held/pledged under securities agreements
Other investments
Other assets

22

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




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.
Other investments: Other investments include Certified Capital Company tax credits, business debentures, credit tenant loans and social impact loans which are recorded at amortized cost. The carrying value reported for these investments approximates fair value. Due to the nature of these investments, there is a lack of liquidity in the primary market which results in the holdings being classified as Level 3.
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.

23

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March, 2015 and 2014
(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:
 
March 31, 2015
 
 
 
Fair Value
 
Carrying
Value