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EX-31.2 - EXHIBIT 31.2 - ASSURANT INCaiz-20150930exh312.htm
EX-31.1 - EXHIBIT 31.1 - ASSURANT INCaiz-20150930exh311.htm
EX-32.2 - EXHIBIT 32.2 - ASSURANT INCaiz-20150930exh322.htm
EX-32.1 - EXHIBIT 32.1 - ASSURANT INCaiz-20150930exh321.htm
EX-12.1 - EXHIBIT 12.1 - ASSURANT INCaiz-20150930exh121.htm

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, 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 October 29, 2015 was 65,839,094.
 
 
 
 
 




ASSURANT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 2015 and December 31, 2014
 
 
 



 
September 30, 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 - $9,426,612 in 2015 and
   $10,048,100 in 2014)
$
10,313,929

 
$
11,263,174

Equity securities available for sale, at fair value (cost - $466,294 in 2015 and $434,875 in 2014)
522,903

 
499,407

Commercial mortgage loans on real estate, at amortized cost
1,233,230

 
1,272,616

Policy loans
44,742

 
48,272

Short-term investments
747,965

 
345,246

Collateral held/pledged under securities agreements
51,034

 
95,985

Other investments
585,799

 
606,752

Total investments
13,499,602

 
14,131,452

Cash and cash equivalents
1,543,936

 
1,318,656

Premiums and accounts receivable, net
1,274,333

 
1,445,630

Reinsurance recoverables
7,279,955

 
7,254,585

Accrued investment income
136,960

 
138,868

Deferred acquisition costs
3,126,301

 
2,957,740

Property and equipment, at cost less accumulated depreciation
286,751

 
277,645

Tax receivable
29,335

 
15,132

Goodwill
841,183

 
841,239

Value of business acquired
43,935

 
45,462

Other intangible assets, net
300,781

 
381,960

Other assets
468,669

 
847,860

Assets held in separate accounts
1,754,350

 
1,906,237

Total assets
$
30,586,091

 
$
31,562,466

Liabilities
 
 
 
Future policy benefits and expenses
$
9,465,642

 
$
9,483,672

Unearned premiums
6,449,260

 
6,529,675

Claims and benefits payable
4,080,309

 
3,698,606

Commissions payable
435,772

 
487,322

Reinsurance balances payable
121,386

 
157,089

Funds held under reinsurance
93,745

 
75,161

Deferred gain on disposal of businesses
91,074

 
100,817

Obligation under securities agreements
51,034

 
95,986

Accounts payable and other liabilities
2,188,615

 
2,675,515

Debt
1,171,305

 
1,171,079

Liabilities related to separate accounts
1,754,350

 
1,906,237

Total liabilities
25,902,492

 
26,381,159

Commitments and contingencies (Note 15)

 

Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 66,746,690 and 69,299,559
   shares outstanding at September 30, 2015 and December 31, 2014, respectively
1,497

 
1,490

Additional paid-in capital
3,138,801

 
3,131,274

Retained earnings
4,824,192

 
4,809,287

Accumulated other comprehensive income
246,038

 
555,767

Treasury stock, at cost; 82,598,071 and 79,338,142 shares at September 30, 2015 and December 31,
   2014, respectively
(3,526,929
)
 
(3,316,511
)
Total stockholders’ equity
4,683,599

 
5,181,307

Total liabilities and stockholders’ equity
$
30,586,091

 
$
31,562,466


See the accompanying notes to the consolidated financial statements

2



Assurant, Inc.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands except number of shares and per share amounts)
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
2,058,421

 
$
2,257,809

 
$
6,356,241

 
$
6,490,005

Net investment income
148,766

 
162,009

 
468,825

 
497,575

Net realized gains on investments, excluding other-than-
   temporary impairment losses
6,910

 
17,744

 
25,434

 
43,612

Total other-than-temporary impairment losses
(1,696
)
 

 
(4,904
)
 
(69
)
Portion of net loss recognized in other comprehensive
   income, before taxes
989

 

 
1,627

 
39

Net other-than-temporary impairment losses recognized in
   earnings
(707
)
 

 
(3,277
)
 
(30
)
Amortization of deferred gain on disposal of businesses
3,243

 
3,645

 
9,743

 
10,949

Fees and other income
317,523

 
261,281

 
920,694

 
716,850

Total revenues
2,534,156

 
2,702,488

 
7,777,660

 
7,758,961

Benefits, losses and expenses
 
 
 
 
 
 
 
Policyholder benefits
1,254,205

 
1,123,693

 
3,732,646

 
3,281,338

Amortization of deferred acquisition costs and value of
   business acquired
341,439

 
386,709

 
1,064,325

 
1,098,080

Underwriting, general and administrative expenses
956,984

 
953,559

 
2,848,387

 
2,681,135

Interest expense
13,779

 
13,776

 
41,335

 
44,617

Total benefits, losses and expenses
2,566,407

 
2,477,737

 
7,686,693

 
7,105,170

(Loss) income before (benefit) provision for income taxes
(32,251
)
 
224,751

 
90,967

 
653,791

(Benefit) provision for income taxes
(25,229
)
 
84,454

 
15,156

 
232,639

Net (loss) income
$
(7,022
)
 
$
140,297

 
$
75,811

 
$
421,152

Earnings Per Share
 
 
 
 
 
 
 
Basic
$
(0.10
)
 
$
1.94

 
$
1.10

 
$
5.80

Diluted
$
(0.10
)
 
$
1.92

 
$
1.09

 
$
5.74

Dividends per share
$
0.30

 
$
0.27

 
$
0.87

 
$
0.79

Share Data
 
 
 
 
 
 
 
Weighted average shares outstanding used in basic per
   share calculations
67,632,920

 
72,182,547

 
68,646,043

 
72,561,191

Plus: Dilutive securities

 
864,157

 
695,843

 
866,171

Weighted average shares used in diluted per share
   calculations
67,632,920

 
73,046,704

 
69,341,886

 
73,427,362

See the accompanying notes to the consolidated financial statements

3



Assurant, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Net (loss) income
$
(7,022
)
 
$
140,297

 
$
75,811

 
$
421,152

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in unrealized gains on securities, net of taxes
   of $15,262, $27,439, $103,490 and $(129,418),
   respectively
(34,719
)
 
(51,617
)
 
(200,324
)
 
259,350

Change in other-than-temporary impairment gains,
   net of taxes of $1,031, $48, $1,663 and $(1,236),
   respectively
(1,914
)
 
(89
)
 
(3,089
)
 
2,295

Change in foreign currency translation, net of taxes of
   $2,543, $(10,957), $4,486 and $1,396, respectively
(68,499
)
 
(54,264
)
 
(114,299
)
 
(34,434
)
Amortization of pension and postretirement
   unrecognized net periodic benefit cost, net of taxes
   of $(1,481), $(885), $(4,299) and $(3,073),
   respectively
2,751

 
1,644

 
7,983

 
5,705

Total other comprehensive (loss) income
(102,381
)
 
(104,326
)
 
(309,729
)
 
232,916

Total comprehensive (loss) income
$
(109,403
)
 
$
35,971

 
$
(233,918
)
 
$
654,068

See the accompanying notes to the consolidated financial statements

4



Assurant, Inc.
Consolidated Statement of Stockholders’ Equity (unaudited)
From December 31, 2014 through September 30, 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
7

 
(15,834
)
 

 

 

 
(15,827
)
Stock plan compensation
  expense

 
24,162

 

 

 

 
24,162

Change in tax benefit from
  share-based payment
  arrangements

 
(801
)
 

 

 

 
(801
)
Dividends

 

 
(60,906
)
 

 

 
(60,906
)
Acquisition of common
  stock

 

 

 

 
(210,418
)
 
(210,418
)
Net income

 

 
75,811

 

 

 
75,811

Other comprehensive
 loss

 

 

 
(309,729
)
 

 
(309,729
)
Balance, September 30, 2015
$
1,497

 
$
3,138,801

 
$
4,824,192

 
$
246,038

 
$
(3,526,929
)
 
$
4,683,599

 
See the accompanying notes to the consolidated financial statements

5



Assurant, Inc.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2015 and 2014
 
 
 

 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Net cash provided by operating activities
$
529,474

 
$
514,664

Investing activities
 
 
 
Sales of:
 
 
 
Fixed maturity securities available for sale
1,867,603

 
1,288,291

Equity securities available for sale
101,566

 
83,488

Other invested assets
45,902

 
60,598

Property and equipment and other
3,394

 
173

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

 

Maturities, calls, prepayments, and scheduled redemption of:
 
 
 
Fixed maturity securities available for sale
533,834

 
585,263

Commercial mortgage loans on real estate
163,310

 
119,085

Purchases of:
 
 
 
Fixed maturity securities available for sale
(1,924,070
)
 
(1,877,572
)
Equity securities available for sale
(133,662
)
 
(122,071
)
Commercial mortgage loans on real estate
(136,248
)
 
(88,531
)
Other invested assets
(25,772
)
 
(28,402
)
Property and equipment and other
(89,433
)
 
(58,879
)
Subsidiary, net of cash transferred (4)
(16,844
)
 
(88,155
)
Equity interest (1)

 
(20,950
)
Change in short-term investments
(432,406
)
 
2,326

Change in policy loans
3,246

 
2,576

Change in collateral held/pledged under securities agreements
44,952

 
(768
)
Net cash provided by (used in) investing activities
70,374

 
(143,528
)
Financing activities
 
 
 
Repayment of debt

 
(467,330
)
Change in tax benefit from share-based payment arrangements
(801
)
 
14,387

Acquisition of common stock
(218,673
)
 
(115,866
)
Dividends paid
(60,906
)
 
(58,382
)
Payment of contingent obligations (2)

 
(31,871
)
Change in obligation under securities agreements
(44,952
)
 
768

Net cash used in financing activities
(325,332
)
 
(658,294
)
Effect of exchange rate changes on cash and cash equivalents
(35,459
)
 
(18,760
)
Cash included in business classified as held for sale
(13,777
)
 

Change in cash and cash equivalents
225,280

 
(305,918
)
Cash and cash equivalents at beginning of period
1,318,656

 
1,717,184

Cash and cash equivalents at end of period
$
1,543,936

 
$
1,411,266

 
(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.
(4)
Relates to the acquisition of Coast to Coast Companies and Rent Collect Global in 2015 and StreetLinks LLC in 2014.
See the accompanying notes to the consolidated financial statements

6


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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; extended service products and related services for consumer electronics, appliances and vehicles; pre-funded funeral insurance; lender-placed homeowners insurance; property preservation and valuation services; flood insurance; renters insurance and related products; debt protection administration; credit insurance; manufactured housing homeowners insurance; group dental insurance; group disability insurance; and group life insurance.
As previously announced, the Company concluded a comprehensive review of its portfolio and decided to sharpen its focus on specialty housing and lifestyle protection products and services. As a result, the Company will exit the health insurance market and has signed a definitive agreement to sell its Assurant Employee Benefits segment. See Note 4 and Note 5, respectively, for more information.
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, 2015 and December 31, 2014 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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 and Nine Months Ended September 30, 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. In August 2015, the FASB issued guidance to defer the effective date of the revenue recognition guidance. The amended guidance is effective for interim and annual periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Therefore, the Company is required to adopt the guidance on January 1, 2018. 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. Reorganization
On June 7, 2015, the Company concluded its comprehensive review of strategic alternatives for the Assurant Health business segment and decided to sharpen its focus on housing and lifestyle specialty protection products and services. The Company has begun a process to wind down its major medical operations and expects to substantially complete its exit from the health insurance market by the end of 2016. As part of this process, Assurant reinsured its supplemental and small-group self-funded lines of business and sold certain legal entities to National General Holdings Corp. ("National General"), effective October 1, 2015.

8


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




The following table presents information regarding exit-related charges:
 
Severance and retention
 
Long-lived asset impairments and contract and lease terminations
 
Other transaction costs
 
Total
Balance at January 1, 2015
$

 
$

 
$

 
$

Charges
14,435

 
22,307

 
4,996

 
41,738

Non-cash adjustment

 
(21,247
)
 
(2,947
)
 
(24,194
)
Cash payments

 

 

 

Balance at June 30, 2015
$
14,435

 
$
1,060

 
$
2,049

 
$
17,544

Charges
20,927

 
13

 
5,795

 
26,735

Cash payments
(10,728
)
 
(168
)
 
(4,338
)
 
(15,234
)
Balance at September 30, 2015
$
24,634

 
$
905

 
$
3,506

 
$
29,045

 
 
 
 
 
 
 
 
Amount expected to be incurred
$
84,755

 
$
27,487

 
$
11,079

 
$
123,321

 
 
 
 
 
 
 
 
Premium deficiency reserves
 
 
 
 
 
 
$
169,101

Total amount expected to be incurred
 
 
 
 
 
 
$
292,422

Amounts in the above table are included in underwriting, general and administrative expenses on the Consolidated Statements of Operations.
The total amount expected to be incurred is an estimate that is subject to change as facts and circumstances evolve. For instance, severance and retention estimates could change if employees previously identified for separation resign from the Company before the date through which they are required to be employed in order to receive severance and retention benefits.
The premium deficiency reserve liability increased $46,613 from $122,488 at June 30, 2015 to $169,101 at September 30, 2015. The $46,613 is included in policyholder benefits on the Consolidated Statements of Operations as adverse claims development and expenses during the three months ended September 30, 2015 and additional losses expected to be incurred during the exit process exceeded the expected amounts in the original premium deficiency reserve liability established at June 30, 2015.
Future cash payments, for these exit-related charges, are expected to be substantially complete by 2016.
5. Dispositions
On October 7, 2015, the Company sold certain assets related to the Assurant Specialty Property’s automobile title administration services business for cash consideration of $19,600. The amount of assets classified as held for sale at September 30, 2015 is deemed to be immaterial and the anticipated gain on sale will be recognized in the fourth quarter.
On October 1, 2015, the Company completed the sale of Assurant Health’s supplemental and small-group self-funded lines of business and certain assets to National General, for cash consideration of $14,000, consisting primarily of a ceding commission. The sale was structured in two parts: coinsurance agreements, with related trust accounts, for the insurance business; and a stock sale for certain non-insurance legal entities. The assets and liabilities related to the coinsurance agreements do not qualify as held for sale. The amount of the non-insurance assets and liabilities classified as held for sale at September 30, 2015 is deemed to be immaterial and there is no resulting loss on the transaction. The Company recognized a tax benefit related to the sale of these legal entities. See Note 16 for more information on the tax benefit.
On September 9, 2015, the Company entered into a Master Transaction Agreement with Sun Life Assurance Company of Canada, a subsidiary of Sun Life Financial Inc., to sell its Assurant Employee Benefits segment for cash consideration of approximately $940,000 consisting primarily of a ceding commission. The sale structure includes the following: coinsurance agreements, with related trust accounts, for the insurance business; stock sale for certain legal entities; administrative agreement

9


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




for certain non-insurance contracts; and asset sale of certain software and fixed assets. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first quarter of 2016. The assets and liabilities related to the coinsurance agreements do not qualify as held for sale. The sale of the legal entities and other non-insurance assets and liabilities meets the criteria for held for sale accounting as of September 30, 2015.
As of September 30, 2015, the divested legal entities and other non-insurance assets and liabilities had assets of $88,128 (primarily consisting of $43,519 of investments and cash and cash equivalents, $17,984 of premiums and accounts receivable, $16,560 of property and equipment, and $8,826 of other intangible assets) and liabilities of $24,104 (primarily consisting of $22,738 of accounts payable and other liabilities). These assets and liabilities are classified as held for sale and are included in other assets and accounts payable and other liabilities in the Company’s Consolidated Balance Sheets, respectively.
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 gains (losses) of $5,284 and $(4,164) for the three months ended March 31, 2015 and June 30, 2015, respectively. The $1,120 net gain recorded on the sale is classified in underwriting, general and administrative expenses on the Consolidated Statements of Operations.

10


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




6. 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, 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
$
163,261

 
$
5,220

 
$
(23
)
 
$
168,458

 
$

States, municipalities and political
  subdivisions
686,419

 
54,308

 
(113
)
 
740,614

 

Foreign governments
526,037

 
63,984

 
(1,313
)
 
588,708

 

Asset-backed
3,600

 
1,432

 
(164
)
 
4,868

 
1,341

Commercial mortgage-backed
27,067

 
682

 
(1
)
 
27,748

 

Residential mortgage-backed
983,316

 
58,630

 
(1,866
)
 
1,040,080

 
15,894

Corporate
7,036,912

 
771,885

 
(65,344
)
 
7,743,453

 
18,927

Total fixed maturity securities
$
9,426,612

 
$
956,141

 
$
(68,824
)
 
$
10,313,929

 
$
36,162

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
24,882

 
$
15,418

 
$
(3
)
 
$
40,297

 
$

Non-redeemable preferred stocks
441,412

 
44,276

 
(3,082
)
 
482,606

 

Total equity securities
$
466,294

 
$
59,694

 
$
(3,085
)
 
$
522,903

 
$

 
 
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.
 

11


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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 September 30, 2015 and December 31, 2014. At September 30, 2015 and December 31, 2014, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $338,038 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 September 30, 2015 and December 31, 2014, revenue bonds account for 50% and 51% 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, 2015, approximately 77%, 10% 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 September 30, 2015 and December 31, 2014, respectively.
The Company has European investment exposure in its corporate fixed maturity and equity securities of $882,693 with a net unrealized gain of $80,997 at September 30, 2015 and $1,060,655 with a net unrealized gain of $116,975 at December 31, 2014. Approximately 26% and 22% of the corporate European exposure is held in the financial industry at September 30, 2015 and December 31, 2014, respectively. Our largest European country exposure represented approximately 5% of the fair value of our corporate securities as of September 30, 2015 and December 31, 2014. Approximately 6% 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 $821,968 with a net unrealized gain of $40,339 at September 30, 2015 and $992,012 with a net unrealized gain of $89,590 at December 31, 2014. Approximately 89% of the energy exposure is rated as investment grade as of September 30, 2015 and December 31, 2014.
The cost or amortized cost and fair value of fixed maturity securities at September 30, 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
$
327,617

 
$
331,813

Due after one year through five years
1,860,951

 
1,961,792

Due after five years through ten years
2,088,935

 
2,166,204

Due after ten years
4,135,126

 
4,781,424

Total
8,412,629

 
9,241,233

Asset-backed
3,600

 
4,868

Commercial mortgage-backed
27,067

 
27,748

Residential mortgage-backed
983,316

 
1,040,080

Total
$
9,426,612

 
$
10,313,929



12


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales
$
621,194

 
$
401,627

 
$
1,978,183

 
$
1,403,671

Gross realized gains
15,097

 
18,109

 
41,352

 
49,696

Gross realized losses
6,707

 
1,607

 
18,150

 
8,174

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,
 
2015
 
2014
 
2015
 
2014
Net realized gains (losses) related to sales and other:
 
 
 
 
 
 
 
Fixed maturity securities
$
5,638

 
$
17,848

 
$
17,897

 
$
39,538

Equity securities
1,449

 
(149
)
 
3,403

 
4,988

Other investments
(177
)
 
45

 
4,134

 
(914
)
Total net realized gains related to sales and other
6,910

 
17,744

 
25,434

 
43,612

Net realized losses related to other-than-temporary
   impairments:
 
 
 
 
 
 
 
Fixed maturity securities
(707
)
 

 
(3,277
)
 
(30
)
Total net realized gains
$
6,203

 
$
17,744

 
$
22,157

 
$
43,582

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 and nine months ended September 30, 2015, the Company recorded $1,696 and $4,904, respectively, of OTTI, of which $707 and $3,277, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $989 and $1,627, respectively, related to all other factors and recorded as an unrealized loss component of AOCI. There was no OTTI recorded 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.

13


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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 September 30,
 
2015
 
2014
Balance, June 30,
$
34,308

 
$
39,248

Additions for credit loss impairments recognized in the current period on securities not
  previously impaired
51

 

Reductions for increases in cash flows expected to be collected that are recognized over
  the remaining life of the security
(656
)
 
(506
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(90
)
 
(1,662
)
Balance, September 30,
$
33,613

 
$
37,080

 
 
Nine Months Ended September 30,
 
2015
 
2014
Balance, January 1,
$
35,424

 
$
45,278

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

 
30

Additions for credit loss impairments recognized in the current period on securities not
  previously impaired
2,621

 

Reductions for increases in cash flows expected to be collected that are recognized over
  the remaining life of the security
(1,731
)
 
(3,151
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(2,701
)
 
(5,077
)
Balance, September 30,
$
33,613

 
$
37,080

The Company regularly monitors it's 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

14


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




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 September 30, 2015 and December 31, 2014 were as follows:
 
September 30, 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
$
3,348

 
$
(18
)
 
$
5,859

 
$
(5
)
 
$
9,207

 
$
(23
)
States, municipalities and political
  subdivisions
21,214

 
(113
)
 

 

 
21,214

 
(113
)
Foreign governments
40,801

 
(593
)
 
21,054

 
(720
)
 
61,855

 
(1,313
)
Asset-backed

 

 
1,208

 
(164
)
 
1,208

 
(164
)
Commercial mortgage-backed
1,137

 
(1
)
 

 

 
1,137

 
(1
)
Residential mortgage-backed
215,948

 
(1,714
)
 
13,824

 
(152
)
 
229,772

 
(1,866
)
Corporate
1,093,249

 
(60,491
)
 
34,841

 
(4,853
)
 
1,128,090

 
(65,344
)
Total fixed maturity securities
$
1,375,697

 
$
(62,930
)
 
$
76,786

 
$
(5,894
)
 
$
1,452,483

 
$
(68,824
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
457

 
$
(3
)
 
$

 
$

 
$
457

 
$
(3
)
Non-redeemable preferred stocks
91,304

 
(2,086
)
 
13,804

 
(996
)
 
105,108

 
(3,082
)
Total equity securities
$
91,761

 
$
(2,089
)
 
$
13,804

 
$
(996
)
 
$
105,565

 
$
(3,085
)
 

15


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




 
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
)
Total gross unrealized losses represent approximately 5% and 2% of the aggregate fair value of the related securities at September 30, 2015 and December 31, 2014, respectively. Approximately 90% and 63% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2015 and December 31, 2014, respectively. The total gross unrealized losses are comprised of 637 and 385 individual securities at September 30, 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 September 30, 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 September 30, 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. 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, 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 September 30, 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 September 30, 2015, approximately 40% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Oregon. 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 $17 to $14,888 at September 30, 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.
 

16


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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:
 
September 30, 2015
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
1,164,430

 
94.2
%
 
2.02

71 – 80%
56,150

 
4.5
%
 
1.21

81 – 95%
5,379

 
0.4
%
 
1.05

Greater than 95%
10,670

 
0.9
%
 
2.13

Gross commercial mortgage loans
1,236,629

 
100
%
 
1.98

Less valuation allowance
(3,399
)
 
 
 
 
Net commercial mortgage loans
$
1,233,230

 
 
 
 
 
 
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 September 30, 2015 and December 31, 2014, our collateral held under securities lending agreements, the use of which is unrestricted, was $51,034 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 $51,034 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. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments. 

17


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2015 and 2014
(In thousands, except number of shares and per share amounts)
 
 
 




As of September 30, 2015, all of the obligation under securities agreements is invested in corporate fixed maturities and money market funds 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.
7. 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.
The Company reviews 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.
 

18


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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 September 30, 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. 
 
September 30, 2015
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
United States Government and government agencies
  and authorities
$
168,458

 
$

  
 
$
168,458

  
 
$

  
State, municipalities and political subdivisions
740,614

 

  
 
740,614

  
 

  
Foreign governments
588,708

 
882

  
 
587,826

  
 

  
Asset-backed
4,868

 

  
 
4,868

  
 

  
Commercial mortgage-backed
27,748

 

  
 
27,493

  
 
255

  
Residential mortgage-backed
1,040,080

 

  
 
1,030,462

  
 
9,618

  
Corporate
7,743,453

 

  
 
7,704,786

  
 
38,667

  
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
40,297

 
39,614

  
 
683

  
 

  
Non-redeemable preferred stocks
482,606

 

  
 
480,526

  
 
2,080

  
Short-term investments
747,965

 
688,688

 
59,277

 

  
Collateral held/pledged under securities agreements
51,034

 
48,834

 
2,200

 

  
Other investments
256,093

 
59,676

 
194,014

 
2,403

Cash equivalents
1,012,743

 
1,011,060

 
1,683

 

  
Other assets
800

 

  
 
199

 
601

Assets held in separate accounts
1,706,428

 
1,564,291

 
142,137

 

  
Total financial assets
$
14,611,895

 
$
3,413,045

  
 
$
11,145,226

  
 
$
53,624

  
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
87,489

 
$
59,676

 
$
4

 
$
27,809

Liabilities related to separate accounts
1,706,428

 
1,564,291

 
142,137

 

   
Total financial liabilities
$
1,793,917

 
$
1,623,967

  
 
$
142,141

   
 
$
27,809

   

 
 

19


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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.

20


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 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 and nine months ended September 30, 2015 and 2014: 
 
Three Months Ended September 30, 2015
 
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
out (3)
 
Balance,
end of
period
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-
  backed
$
304

 
$

 
$
(2
)
 
$

 
$
(47
)
 
$

 
$
255

Residential mortgage-
  backed

 
1

 
(104
)
 
9,721

 

 

 
9,618

Corporate
49,810

 
18

 
278

 

 
(620
)
 
(10,819
)
 
38,667

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred
  stocks
2,120

 

 
(40
)
 

 

 

 
2,080

  Other investments
2,381

 
58

 
(12
)
 

 
(24