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EX-31.1 - EXHIBIT 31.1 - ASSURANT INCaiz-20160930exh311.htm
EX-32.2 - EXHIBIT 32.2 - ASSURANT INCaiz-20160930exh322.htm
EX-32.1 - EXHIBIT 32.1 - ASSURANT INCaiz-20160930exh321.htm
EX-31.2 - EXHIBIT 31.2 - ASSURANT INCaiz-20160930exh312.htm
EX-12.1 - EXHIBIT 12.1 - ASSURANT INCaiz-20160930exh121.htm
EX-10.1 - EXHIBIT 10.1 - ASSURANT INCaiz-20160930exh101.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, 2016
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 28, 2016 was 57,012,647.
 
 
 
 
 




ASSURANT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
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, 2016 and December 31, 2015
 
 
 



 
September 30, 2016
 
December 31, 2015
 
(in thousands except number of shares and per
share amounts)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities available for sale, at fair value (amortized cost - $8,835,922 in 2016 and
$9,470,795 in 2015)
$
9,919,591

 
$
10,215,328

Equity securities available for sale, at fair value (cost - $392,780 in 2016 and $450,563 in 2015)
450,617

 
500,057

Commercial mortgage loans on real estate, at amortized cost
595,067

 
1,151,256

Policy loans
40,113

 
43,858

Short-term investments
396,598

 
508,950

Other investments
631,104

 
575,323

Total investments
12,033,090

 
12,994,772

Cash and cash equivalents
1,116,623

 
1,288,305

Premiums and accounts receivable, net
1,312,738

 
1,260,717

Reinsurance recoverables
9,059,947

 
7,470,403

Accrued investment income
116,823

 
129,743

Deferred acquisition costs
3,034,091

 
3,150,934

Property and equipment, at cost less accumulated depreciation
337,100

 
298,414

Tax receivable

 
24,176

Goodwill
839,681

 
833,512

Value of business acquired
34,350

 
41,154

Other intangible assets, net
263,284

 
277,163

Other assets
397,169

 
469,005

Assets held in separate accounts
1,738,940

 
1,798,104

Total assets
$
30,283,836

 
$
30,036,402

Liabilities
 
 
 
Future policy benefits and expenses
$
10,042,896

 
$
9,466,694

Unearned premiums
6,443,266

 
6,423,720

Claims and benefits payable
3,397,455

 
3,896,719

Commissions payable
382,778

 
393,260

Reinsurance balances payable
116,233

 
132,728

Funds held under reinsurance
106,924

 
94,417

Deferred gains on disposal of businesses
318,411

 
92,327

Accounts payable and other liabilities
2,009,379

 
2,049,810

Tax payable
57,083

 

Debt
1,165,557

 
1,164,656

Liabilities related to separate accounts
1,738,940

 
1,798,104

Total liabilities
25,778,922

 
25,512,435

Commitments and contingencies (Note 16)

 

Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 58,010,506 and 65,850,386
shares outstanding at September 30, 2016 and December 31, 2015, respectively
1,503

 
1,497

Additional paid-in capital
3,168,267

 
3,148,409

Retained earnings
5,295,671

 
4,856,674

Accumulated other comprehensive income
328,106

 
118,549

Treasury stock, at cost; 91,954,392 and 83,523,031 shares at September 30, 2016 and December 31,
2015, respectively
(4,288,633
)
 
(3,601,162
)
Total stockholders’ equity
4,504,914

 
4,523,967

Total liabilities and stockholders’ equity
$
30,283,836

 
$
30,036,402


See the accompanying notes to the consolidated financial statements

2



Assurant, Inc.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands except number of shares and per share amounts)
Revenues
 
 
 
 
 
 
 
Net earned premiums
$
1,215,133

 
$
2,058,421

 
$
3,832,595

 
$
6,356,241

Fees and other income
347,693

 
317,523

 
1,033,688

 
920,694

Net investment income
124,798

 
148,766

 
380,325

 
468,825

Net realized gains on investments, excluding other-than-
  temporary impairment losses
10,704

 
6,910

 
194,749

 
25,434

Total other-than-temporary impairment losses

 
(1,696
)
 
(364
)
 
(4,904
)
Portion of net loss (gain) recognized in other
  comprehensive income, before taxes

 
989

 
(337
)
 
1,627

Net other-than-temporary impairment losses recognized in
  earnings

 
(707
)
 
(701
)
 
(3,277
)
Amortization of deferred gains and gains on disposal of
  businesses
135,840

 
3,243

 
309,254

 
9,743

Gain on pension plan curtailment

 

 
29,578

 

Total revenues
1,834,168

 
2,534,156

 
5,779,488

 
7,777,660

Benefits, losses and expenses
 
 
 
 
 
 
 
Policyholder benefits
435,173

 
1,254,205

 
1,379,803

 
3,732,646

Amortization of deferred acquisition costs and value of
  business acquired
330,353

 
341,439

 
1,007,335

 
1,064,325

Underwriting, general and administrative expenses
833,778

 
956,984

 
2,554,732

 
2,848,387

Interest expense
14,006

 
13,779

 
43,741

 
41,335

Total benefits, losses and expenses
1,613,310

 
2,566,407

 
4,985,611

 
7,686,693

Income (loss) before provision (benefit) for income taxes
220,858

 
(32,251
)
 
793,877

 
90,967

Provision (benefit) for income taxes
76,491

 
(25,229
)
 
259,843

 
15,156

Net income (loss)
$
144,367

 
$
(7,022
)
 
$
534,034

 
$
75,811

Earnings Per Share
 
 
 
 
 
 
 
Basic
$
2.40

 
$
(0.10
)
 
$
8.54

 
$
1.10

Diluted
$
2.37

 
$
(0.10
)
 
$
8.46

 
$
1.09

Dividends per share
$
0.50

 
$
0.30

 
$
1.50

 
$
0.87

Share Data
 
 
 
 
 
 
 
Weighted average shares outstanding used in basic per
  share calculations
60,262,073

 
67,632,920

 
62,522,980

 
68,646,043

Plus: Dilutive securities
566,268

 

 
570,340

 
695,843

Weighted average shares used in diluted per share
  calculations
60,828,341

 
67,632,920

 
63,093,320

 
69,341,886

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, 2016 and 2015
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income (loss)
$
144,367

 
$
(7,022
)
 
$
534,034

 
$
75,811

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gains on securities, net of taxes of $(8,362), $15,262, $(85,700) and $103,490, respectively
16,334

 
(34,719
)
 
162,146

 
(200,324
)
Change in other-than-temporary impairment gains, net of taxes of $(165), $1,031, $405 and $1,663, respectively
306

 
(1,914
)
 
(753
)
 
(3,089
)
Change in foreign currency translation, net of taxes of $498, $2,543, $(1,157) and $4,486, respectively
(15,966
)
 
(68,499
)
 
(18,630
)
 
(114,299
)
Pension plan curtailment and amortization of pension and postretirement unrecognized net periodic benefit cost, net of taxes of $(96), $(1,481), $(35,966) and $(4,299), respectively
178

 
2,751

 
66,794

 
7,983

Total other comprehensive income (loss)
852

 
(102,381
)
 
209,557

 
(309,729
)
Total comprehensive income (loss)
$
145,219

 
$
(109,403
)
 
$
743,591

 
$
(233,918
)
See the accompanying notes to the consolidated financial statements

4



Assurant, Inc.
Consolidated Statement of Stockholders’ Equity (unaudited)
From December 31, 2015 through September 30, 2016
 
 
 

 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Total
 
(in thousands)
Balance at December 31, 2015
$
1,497

 
$
3,148,409

 
$
4,856,674

 
$
118,549

 
$
(3,601,162
)
 
$
4,523,967

Stock plan exercises
6

 
(18,702
)
 

 

 

 
(18,696
)
Stock plan compensation

 
29,198

 

 

 

 
29,198

Change in tax benefit from
  share-based payment
  arrangements

 
9,362

 

 

 

 
9,362

Dividends

 


 
(95,037
)
 

 

 
(95,037
)
Acquisition of common
  stock

 

 

 

 
(687,471
)
 
(687,471
)
Net income

 

 
534,034

 

 

 
534,034

Other comprehensive
 income

 

 

 
209,557

 

 
209,557

Balance, September 30, 2016
$
1,503

 
$
3,168,267

 
$
5,295,671

 
$
328,106

 
$
(4,288,633
)
 
$
4,504,914

 
See the accompanying notes to the consolidated financial statements

5



Assurant, Inc.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2016 and 2015
 
 
 

 
Nine Months Ended September 30,
 
2016
 
2015
 
(in thousands)
Net cash (used in) provided by operating activities
$
(43,055
)
 
$
529,474

Investing activities
 
 
 
Sales of:
 
 
 
Fixed maturity securities available for sale
1,736,090

 
1,867,603

Equity securities available for sale
160,037

 
101,566

Other invested assets
51,907

 
45,902

Property and equipment and other
292

 
3,394

Subsidiary, net of cash transferred (1)
873,920

 
65,002

Commercial mortgage loans on real estate (2)
268,833

 

Maturities, calls, prepayments, and scheduled redemption of:
 
 
 
Fixed maturity securities available for sale
589,352

 
533,834

Commercial mortgage loans on real estate
86,953

 
163,310

Purchases of:
 
 
 
Fixed maturity securities available for sale
(2,832,399
)
 
(1,924,070
)
Equity securities available for sale
(150,482
)
 
(133,662
)
Commercial mortgage loans on real estate
(52,198
)
 
(136,248
)
Other invested assets
(79,176
)
 
(25,772
)
Property and equipment and other
(66,791
)
 
(89,433
)
Subsidiaries, net of cash transferred (3)
(63,243
)
 
(16,844
)
Change in short-term investments
106,025

 
(432,406
)
Change in policy loans
2,145

 
3,246

Change in collateral held/pledged under securities agreements

 
44,952

Net cash provided by investing activities
631,265

 
70,374

Financing activities
 
 
 
Issuance of debt
249,625

 

Repayment of debt
(250,000
)
 

Change in tax benefit from share-based payment arrangements
9,362

 
(801
)
Acquisition of common stock
(674,251
)
 
(218,673
)
Dividends paid
(95,037
)
 
(60,906
)
Change in obligation under securities agreements

 
(44,952
)
Net cash used in financing activities
(760,301
)
 
(325,332
)
Effect of exchange rate changes on cash and cash equivalents
(5,449
)
 
(35,459
)
Adjustments for cash included in business classified as held for sale
5,858

 
(13,777
)
Change in cash and cash equivalents
(171,682
)
 
225,280

Cash and cash equivalents at beginning of period
1,288,305

 
1,318,656

Cash and cash equivalents at end of period
$
1,116,623

 
$
1,543,936

 

(1)
Relates to the sale of Assurant's Employee Benefits segment mainly through reinsurance transactions and supplemental and small group self-funded business.
(2)
For further information see Note 7.
(3)
Relates primarily to the acquisition of Shipsurance, Mobile Defense and American Title and the purchase of renewal rights to the National Flood Insurance block of business of Nationwide Mutual Insurance Company.

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, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 





1. Nature of Operations
Assurant, Inc. (the “Company”) is a holding company whose subsidiaries globally provide risk management solutions, protecting where consumers live and the goods they buy.
The Company is traded on the New York Stock Exchange under the symbol "AIZ."
Through its operating subsidiaries, the Company provides mobile device protection and related services; extended service contracts; vehicle protection; pre-funded funeral insurance; credit insurance; renters insurance; lender-placed homeowners insurance; mortgage valuation and field services and manufactured housing insurance.
As previously announced, the Company will substantially exit the health insurance market by the end of 2016 and sold its Assurant Employee Benefits segment on March 1, 2016 mainly through a series of reinsurance transactions with Sun Life Assurance Company of Canada, a subsidiary of Sun Life Financial Inc. (“Sun Life”). See Notes 4 and 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 notes required by GAAP for complete financial statements.
The interim financial data as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 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. Certain prior period amounts have been reclassified to conform to the 2016 presentation.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together, the “Affordable Care Act”) 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 have materially changed in prior periods as experience develops until the Company exits the Health business and settles related receivables. However, given the significant reduction in recoverables under the programs and remaining reserves as of September 30, 2016, the Company believes that such changes will no longer be material to the consolidated financial statements.
Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.
3. Recent Accounting Pronouncements
Adopted
On January 1, 2016 the Company adopted the 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 liabilities, consistent with debt discounts or premiums, as compared to previous guidance that required capitalization as a deferred asset. The recognition and measurement guidance for debt issuance costs is not affected by the amendments. The adoption of this new presentation guidance did not 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, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




On January 1, 2016, the Company adopted the 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 adoption of this new consolidation guidance did not have an impact on the Company’s financial position and results of operations.
Not Yet Adopted
In August 2016, the Financial Accounting Standards Board (“FASB”) issued amended guidance on presentation and classification in the statement of cash flows. The amendments address certain specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon or insignificant coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and guidance related to the identification of the primary source for separately identifiable cash flows. The amended guidance is effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2018. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company is evaluating the requirements of this amended presentation and classification guidance and the potential impact on the Company’s statement of cash flows.
In June 2016, the FASB issued amended guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the amended guidance eliminates the probable recognition threshold, and, instead requires an entity to reflect the current estimate of all expected credit losses. For available for sale debt securities, credit losses are measured in a manner similar to current GAAP, however the amended guidance requires that credit losses be presented as an allowance rather than as a permanent impairment. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amended guidance is effective in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2020. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the requirements of this amended credit losses guidance and the potential impact on the Company’s financial position and results of operations.
In March 2016, the FASB issued amended guidance on accounting for employee share-based stock compensation. The updated guidance requires the excess tax benefit or deficiency on vesting or settlement of awards to be recognized in earnings as income tax benefit or expense, respectively. This recognition of excess tax benefits and deficiencies will result in earnings volatility as current accounting guidance recognizes these amounts as an adjustment to additional paid-in capital. The excess tax benefits or deficiencies are discrete items in the reporting period in which they occur, and thus will not be considered in determining the annual estimated effective tax rate. The excess tax benefits or deficiencies will be presented as a cash flow within operating activities instead of within financing activities as is the case under current accounting. The Company will adopt the updated guidance on January 1, 2017 and will recognize excess tax benefits or deficiencies in net income, as well as the related cash flows in operating activities, on a prospective basis. The earnings impact of the adoption will depend on the excess tax benefits or deficiencies realized on vesting or settlement of awards resulting from the difference between the market value of awards at vesting or settlement and the grant date fair value.
In February 2016, the FASB issued new guidance on leases. The new guidance will replace the current lease guidance. The new guidance requires that entities recognize the assets and liabilities associated with leases on the balance sheet and to disclose key information about leasing arrangements. The new guidance is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2019. Early adoption is permitted. The Company is evaluating the requirements of this new lease guidance and the potential impact on the Company’s financial position and results of operations.
In January 2016, the FASB issued amended guidance on the measurement and classification of financial instruments. This amended guidance requires that all equity investments be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the fair value option

8


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




has been elected for financial liabilities. The amendments eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, however public business entities will be required to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. In addition, the new guidance requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The amended guidance is effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2018. For the provision related to presentation of financial liabilities, early adoption is permitted for financial statements that have not been previously issued. The Company is evaluating the requirements of this amended measurement and classification of financial instruments 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. In March, April and May 2016, the FASB issued implementation amendments to the May 2014 amended revenue recognition guidance. The amended guidance, including the implementation amendments (together, 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
As previously announced, the Company 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.

9


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following table presents information regarding exit-related charges, commencing with those taken in the second quarter of 2015:
 
Severance and retention
 
Long-lived asset impairments and contract and lease terminations
 
Other transaction costs
 
Total
Balance at January 1, 2015
$

 
$

 
$

 
$

Charges

 

 

 

Cash payments

 

 

 

Balance at March 31, 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

Charges
16,344

 
17

 
795

 
17,156

Cash payments
(4,413
)
 
(152
)
 
(3,808
)
 
(8,373
)
Balance at December 31, 2015
$
36,565

 
$
770

 
$
493

 
$
37,828

Charges
14,561

 
4,903

 
(47
)
 
19,417

Cash payments
(16,181
)
 
(136
)
 
(436
)
 
(16,753
)
Balance at March 31, 2016
$
34,945

 
$
5,537

 
$
10

 
$
40,492

Charges
6,383

 
(32
)
 
7

 
6,358

Cash payments
(15,489
)
 
(214
)
 
(17
)
 
(15,720
)
Balance at June 30, 2016
$
25,839

 
$
5,291

 
$

 
$
31,130

Charges
3,340

 
(333
)
 
7

 
3,014

Cash payments
(8,615
)
 
(113
)
 
(7
)
 
(8,735
)
Balance at September 30, 2016
20,564

 
4,845

 

 
25,409

 
 
 
 
 
 
 
 
Amount expected to be incurred, including charges to date
$
82,145

 
$
26,876

 
$
11,553

 
$
120,574

 
 
 
 
 
 
 
 
Premium deficiency charges
 
 
 
 
 
 
$
182,627

Total amount expected to be incurred, including charges
  to date
 
 
 
 
 
 
$
303,201

Amounts in the above table are primarily 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 decreased from $79,422 at June 30, 2016 to $57,860 at September 30, 2016. The decrease is consistent with the estimate of third quarter utilization expected at June 30, 2016.
Future cash payments, for these exit-related charges, are expected to be substantially complete by December 31, 2016, with remaining payments extending into 2018 as all final wind-down activities are completed.

10


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




5. Dispositions
On March 1, 2016, the Company completed the sale of its Assurant Employee Benefits segment through a series of transactions with Sun Life, for net cash consideration of $926,174 and contingent consideration of $16,000 related to specified account renewals. The transaction was primarily structured as a reinsurance arrangement, as well as the sale of certain legal entities that included ceding commission and other consideration. The reinsurance transaction does not extinguish the Company's primary liability on the policies issued or assumed by subsidiaries that are parties to the reinsurance agreements, thus any gains associated with the prospective component of the reinsurance transaction are deferred and amortized over the contract period, including contractual renewal periods, in proportion to the amount of insurance coverage provided. The Company also has an obligation to continue to write and renew certain policies for a period of time until Sun Life commences policy writing and renewal.
The Company was required to allocate the proceeds considering the relative fair value of the transaction components, including the sale of certain legal entities, the reinsurance for existing claims (accounted for as retroactive reinsurance) and reinsurance for inforce policies with remaining terms and future business (primarily accounted for as prospective reinsurance). As of the close date, the Company originally estimated a gain of $638,517 (which was subsequently increased to $640,497 in the second quarter 2016 due to closing adjustments) based on proceeds compared to the relative net assets transferred and other expenses incurred along with realized gains on invested assets transferred. Of this amount, $120,077 was recognized at the close of the transaction and $518,440 (which was subsequently increased to $520,420 in the second quarter due to closing adjustments) was required to be deferred. During the third quarter 2016, the condition for recognition of the $16,000 contingent consideration was met and the Company received this additional cash consideration from Sun Life. The additional consideration was recognized as a realized gain, increasing the total adjusted gain to $656,497.
The total deferred gain amount will primarily be recognized as revenue over the contract period in proportion to the amount of insurance coverage provided, including estimated contractual renewals pursuant to rate guarantees. The Company recognized $116,856 and $284,284 of amortization of the deferred gains for the three and nine months ended September 30, 2016, respectively. The total pre-tax gain recognized during the nine months ended September 30, 2016 was $420,361.
Approximately 70% of the $520,420 deferred gain related to this transaction (including the $284,284 amortized through September 30, 2016) is expected to be earned in 2016 and over 90% is expected to be earned by the end of 2018. The ultimate amortization pattern will be dependent on a number of factors including the exact timing of when Sun Life commences directly writing and renewing policies and the sales and persistency on business the Company is obligated to write and renew in the interim.

11


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following represents a summary of the pre-tax gain recognized in 2016 by transaction component, as well as the related classification within the financial statements:
Total expected gains, after adjustment and contingent consideration
$
656,497

 
 
 
 
Transaction closing gains on March 1, 2016:
 
 
Gain on sale of entities, net of transaction costs
41,098

 
Novations, resulting in recognized gains
60,913

(b)
Loss on retroactive reinsurance component, before realized gains
(128,661
)
(c)
Net loss prior to realized gains on transferred securities supporting retroactive component
(26,650
)
(a)
Realized gains on transferred securities supporting retroactive component
146,727

(c)
Net gains realized as of March 1, 2016
120,077

 
 
 
 
Realized gains related to contingent consideration
16,000

(d)
 
 
 
Deferred gains as of March 1, 2016, after adjustment
520,420

 
Amortization of deferred gains for the three months ended March 31, 2016
44,593

(d)
Amortization of deferred gains for the three months ended June 30, 2016
122,835

(d)
Amortization of deferred gains for the three months ended September 30, 2016
116,856

(d)
Subtotal amortization of deferred gains for the nine months ended September 30, 2016
284,284

(d)
Deferred gains as of September 30, 2016
236,136

(e)
Total net gains realized for 2016
$
420,361

 
(a)
Amount classified within underwriting, general and administrative expenses within the Consolidated Statements of Operations.
(b)
Novations of certain insurance policies directly to Sun Life allowed for immediate gain recognition.
(c)
Reinsurance of existing claims liabilities requires retroactive accounting necessitating losses to be recognized immediately. However, upon transfer of the associated assets supporting the liabilities, the Company recognized realized gains which more than offset the retroactive losses. The Company was required to classify the realized gains as part of net realized gains on investments, within the Consolidated Statements of Operations.
(d)
Amount classified as amortization of deferred gains and gains on disposal of businesses within the Consolidated Statements of Operations.
(e)
Amount classified as a component of the deferred gains on disposal of businesses within the Consolidated Balance Sheets.
The Company will review and evaluate the estimates affecting the deferred gain each period or when significant information affecting the estimates becomes known, and will adjust the prospective revenue to be recognized accordingly.
The Assurant Employee Benefits segment pretax income was $16,747 and $49,754 for the nine month periods ending September 30, 2016 and 2015, respectively (excluding the aforementioned gains realized in 2016 which are included in the Corporate & Other segment).
6. Acquisitions
On July 1, 2016, the Company acquired 100% of American Title, Inc., a leader in title and valuation services for home equity lenders. The acquisition-date fair value of the initial cash consideration totaled $44,961, with a possible earn-out payment based on future expected revenue and gross profits. The contingent payment was determined to have no initial value based on the Company's assessment that the underlying conditions would not be met. However, this may change over time, with any resulting adjustments recorded in earnings when a change in estimated payment is determined. In connection with the acquisition, the Company recorded $32,356 of customer and technology-based intangible assets, all of which are amortizable over periods ranging from 1 to 12.5 years, and $8,534 of goodwill, none of which is tax-deductible. The primary factor contributing to the recognition of goodwill is future expected growth of this business within Assurant Specialty Property.

12


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 





On March 14, 2016, the Company acquired certain renewal rights to the National Flood Insurance Program block of business of Nationwide Mutual Insurance Company. The estimated acquisition-date fair value of the consideration transferred totaled $20,329, which consists of an initial cash payment of $1,000 and an expected contingent payment of $19,329. The contingent consideration arrangement is based on future expected revenue. In connection with this asset acquisition, the Company recorded $20,329 of renewal rights intangible assets which are amortizable over a five-year period. The contingent payment may change over time, with any resulting adjustments recorded in earnings when a change in estimated payment is determined.


13


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




7. Investments
The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) included within accumulated other comprehensive income of the Company's fixed maturity and equity securities as of the dates indicated: 
 
September 30, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI in
AOCI
(a)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
U.S. government and government
  agencies and authorities
$
175,388

 
$
6,130

 
$
(20
)
 
$
181,498

 
$

States, municipalities and political
  subdivisions
477,381

 
43,385

 
(53
)
 
520,713

 

Foreign governments
524,483

 
98,714

 
(46
)
 
623,151

 

Asset-backed
2,782

 
1,203

 
(167
)
 
3,818

 
1,158

Commercial mortgage-backed
40,872

 
576

 
(41
)
 
41,407

 

Residential mortgage-backed
893,167

 
63,020

 
(57
)
 
956,130

 
13,840

U.S. corporate
5,110,983

 
659,093

 
(5,118
)
 
5,764,958

 
16,232

Foreign corporate
1,610,866

 
219,242

 
(2,192
)
 
1,827,916

 
2,125

Total fixed maturity securities
$
8,835,922

 
$
1,091,363

 
$
(7,694
)
 
$
9,919,591

 
$
33,355

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
12,255

 
$
8,561

 
$
(1
)
 
$
20,815

 
$

Non-redeemable preferred stocks
380,525

 
50,022

 
(745
)
 
429,802

 

Total equity securities
$
392,780

 
$
58,583

 
$
(746
)
 
$
450,617

 
$

 
 
December 31, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI in
AOCI
(a)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
U.S. government and government
  agencies and authorities
$
150,681

 
$
3,891

 
$
(537
)
 
$
154,035

 
$

States, municipalities and political
  subdivisions
647,335

 
48,389

 
(94
)
 
695,630

 

Foreign governments
497,785

 
65,188

 
(723
)
 
562,250

 

Asset-backed
3,499

 
1,367

 
(204
)
 
4,662

 
1,285

Commercial mortgage-backed
22,169

 
352

 

 
22,521

 

Residential mortgage-backed
953,247

 
48,676

 
(3,409
)
 
998,514

 
15,343

U.S. corporate
5,429,783

 
513,254

 
(73,344
)
 
5,869,693

 
15,705

Foreign corporate
1,766,296

 
164,295

 
(22,568
)
 
1,908,023

 
2,180

Total fixed maturity securities
$
9,470,795

 
$
845,412

 
$
(100,879
)
 
$
10,215,328

 
$
34,513

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
13,048

 
$
6,623

 
$
(7
)
 
$
19,664

 
$

Non-redeemable preferred stocks
437,515

 
45,495

 
(2,617
)
 
480,393

 

Total equity securities
$
450,563

 
$
52,118

 
$
(2,624
)
 
$
500,057

 
$

 


14


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




(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.
 
The Company's 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, 2016 and December 31, 2015. At September 30, 2016 and December 31, 2015, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $224,255 and $319,654, 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, 2016 and December 31, 2015, revenue bonds account for 47% and 50% 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, 2016, approximately 78%, 11% and 4% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. At December 31, 2015, approximately 79%, 8% 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 3% of the Company's foreign government securities as of September 30, 2016 and December 31, 2015.
The Company has European investment exposure in its corporate fixed maturity and equity securities of $735,779 with a net unrealized gain of $81,256 at September 30, 2016 and $888,923 with a net unrealized gain of $67,957 at December 31, 2015. Approximately 23% and 25% of the corporate European exposure is held in the financial industry at September 30, 2016 and December 31, 2015, respectively. The Company's largest European country exposure (the United Kingdom) represented approximately 4% and 5% of the fair value of the Company's corporate securities as of September 30, 2016 and December 31, 2015, respectively. Approximately 7% 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. The Company's international investments are managed as part of the 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 $670,295 with a net unrealized gain of $60,856 at September 30, 2016 and $779,720 with a net unrealized loss of $6,985 at December 31, 2015. Approximately 85% and 89% of the energy exposure is rated as investment grade as of September 30, 2016 and December 31, 2015, respectively.
The cost or amortized cost and fair value of fixed maturity securities at September 30, 2016 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.

15


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




 
Cost or
Amortized
Cost
 
Fair Value
Due in one year or less
$
426,548

 
$
431,700

Due after one year through five years
1,730,460

 
1,820,154

Due after five years through ten years
2,150,767

 
2,279,393

Due after ten years
3,591,326

 
4,386,989

Total
7,899,101

 
8,918,236

Asset-backed
2,782

 
3,818

Commercial mortgage-backed
40,872

 
41,407

Residential mortgage-backed
893,167

 
956,130

Total
$
8,835,922

 
$
9,919,591


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 recognized in the statement of operations as a result of those sales:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$
480,593

 
$
621,194

 
$
3,354,841

 
$
1,978,183

Gross realized gains (a)
10,298

 
15,097

 
201,282

 
41,352

Gross realized losses (b)
1,432

 
6,707

 
33,003

 
18,150

(a)
Nine months ended September 30, 2016 gross realized gains includes $150,701 related to the sale of Assurant Employee Benefits as described in Note 5.
(b)
Nine months ended September 30, 2016 gross realized losses includes $16,427 related to the sale of Assurant Employee Benefits as described in Note 5.
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,
 
2016
 
2015
 
2016
 
2015
Net realized gains (losses) related to sales and other:
 
 
 
 
 
 
 
Fixed maturity securities
$
8,737

 
$
5,638

 
$
154,511

 
$
17,897

Equity securities
(203
)
 
1,449

 
12,940

 
3,403

Commercial mortgage loans on real estate
62

 

 
21,607

 

Other investments
2,108

 
(177
)
 
5,691

 
4,134

Total net realized gains related to sales and other (a)
10,704

 
6,910

 
194,749

 
25,434

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

 
(707
)
 
(701
)
 
(3,277
)
Total net realized losses related to other-than-temporary impairments

 
(707
)
 
(701
)
 
(3,277
)
Total net realized gains
$
10,704

 
$
6,203

 
$
194,048

 
$
22,157


16


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




(a)
Nine months ended September 30, 2016 net gains includes $146,727 related to the sale of Assurant Employee Benefits as described in Note 5.
Other-Than-Temporary Impairments
The Company follows the OTTI guidance, which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.
There was no OTTI recorded for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the Company recorded $364 of OTTI, of which $701 was related to both credit losses and securities the Company intends to sell and recorded as net OTTI losses recognized in earnings, with the remaining $337 related to all other factors and was recorded as an unrealized gain component of AOCI. 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 both credit losses and securities the Company intends to sell and recorded as net OTTI losses recognized in earnings, with the remaining $989 and $1,627, respectively, related to all other factors and was recorded as an unrealized loss component of AOCI.
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,
 
2016
 
2015
Balance, June 30,
$
29,104

 
$
34,308

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
(851
)
 
(656
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(597
)
 
(90
)
Balance, September 30,
$
27,656

 
$
33,613

 
 
Nine Months Ended September 30,
 
2016
 
2015
Balance, January 1,
$
32,377

 
$
35,424

Additions for credit loss impairments recognized in the current period on securities
  previously impaired
554

 

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
(2,169
)
 
(1,731
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(3,106
)
 
(2,701
)
Balance, September 30,
$
27,656

 
$
33,613


17


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The Company regularly monitors its 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.

18


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2016 and December 31, 2015 were as follows:
 
September 30, 2016
 
Less than 12 months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government
  agencies and authorities
$
12,003

 
$
(20
)
 
$

 
$

 
$
12,003

 
$
(20
)
States, municipalities and political
  subdivisions
3,947

 
(53
)
 

 

 
3,947

 
(53
)
Foreign governments
58,031

 
(2
)
 
6,919

 
(44
)
 
64,950

 
(46
)
Asset-backed

 

 
1,014

 
(167
)
 
1,014

 
(167
)
Commercial mortgage-backed
16,784

 
(41
)
 

 

 
16,784

 
(41
)
Residential mortgage-backed
34,177

 
(50
)
 
780

 
(7
)
 
34,957

 
(57
)
U.S. corporate
299,506

 
(2,279
)
 
70,774

 
(2,839
)
 
370,280

 
(5,118
)
Foreign corporate
70,303

 
(449
)
 
20,221

 
(1,743
)
 
90,524

 
(2,192
)
Total fixed maturity securities
$
494,751

 
$
(2,894
)
 
$
99,708

 
$
(4,800
)
 
$
594,459

 
$
(7,694
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
339

 
$
(1
)
 
$

 
$

 
$
339

 
$
(1
)
Non-redeemable preferred stocks
11,499

 
(105
)
 
13,762

 
(640
)
 
25,261

 
(745
)
Total equity securities
$
11,838

 
$
(106
)
 
$
13,762

 
$
(640
)
 
$
25,600

 
$
(746
)
 
 
December 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:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government
  agencies and authorities
$
90,008

 
$
(465
)
 
$
5,564

 
$
(72
)
 
$
95,572

 
$
(537
)
States, municipalities and political
  subdivisions
6,881

 
(94
)
 

 

 
6,881

 
(94
)
Foreign governments
24,071

 
(347
)
 
22,239

 
(376
)
 
46,310

 
(723
)
Asset-backed

 

 
1,136

 
(204
)
 
1,136

 
(204
)
Residential mortgage-backed
260,620

 
(3,179
)
 
11,147

 
(230
)
 
271,767

 
(3,409
)
U.S. corporate
1,287,545

 
(65,631
)
 
38,224

 
(7,713
)
 
1,325,769

 
(73,344
)
Foreign corporate
348,912

 
(19,616
)
 
15,805

 
(2,952
)
 
364,717

 
(22,568
)
Total fixed maturity securities
$
2,018,037

 
$
(89,332
)
 
$
94,115

 
$
(11,547
)
 
$
2,112,152

 
$
(100,879
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
623

 
$
(7
)
 
$

 
$

 
$
623

 
$
(7
)
Non-redeemable preferred stocks
63,665

 
(1,632
)
 
13,806

 
(985
)
 
77,471

 
(2,617
)
Total equity securities
$
64,288

 
$
(1,639
)
 
$
13,806

 
$
(985
)
 
$
78,094

 
$
(2,624
)

19


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




Total gross unrealized losses represent approximately 1% and 5% of the aggregate fair value of the related securities at September 30, 2016 and December 31, 2015, respectively. Approximately 36% and 88% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2016 and December 31, 2015, respectively. The total gross unrealized losses are comprised of 239 and 884 individual securities at September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. As of September 30, 2016, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in the Company’s U.S. and foreign 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, the Company applies an impairment model similar to that used for the Company's fixed maturity securities. As of September 30, 2016, 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, 2016, 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, 2016, approximately 34% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, Texas, 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 $7 to $12,671 at September 30, 2016 and from $17 to $14,625 at December 31, 2015.
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.
 

20


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following summarizes the Company's loan-to-value and average debt-service coverage ratios as of the dates indicated:
 
September 30, 2016
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
557,398

 
93.3
%
 
1.94

71 – 80%
15,876

 
2.6
%
 
1.17

81 – 95%
19,497

 
3.3
%
 
1.23

Greater than 95%
4,816

 
0.8
%
 
3.86

Gross commercial mortgage loans
597,587

 
100
%
 
1.91

Less valuation allowance
(2,520
)
 
 
 
 
Net commercial mortgage loans
$
595,067

 
 
 
 
 
 
December 31, 2015
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
1,101,572

 
95.5
%
 
2.01

71 – 80%
39,080

 
3.4
%
 
1.19

81 – 95%
8,370

 
0.7
%
 
1.05

Greater than 95%
4,816

 
0.4
%
 
3.52

Gross commercial mortgage loans
1,153,838

 
100
%
 
1.98

Less valuation allowance
(2,582
)
 
 
 
 
Net commercial mortgage loans
$
1,151,256

 
 
 
 
All commercial mortgage loans that are individually impaired have an established mortgage loan valuation allowance for losses. An additional valuation allowance is established for incurred, but not specifically identified impairments. Changing economic conditions affect the Company's valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs 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, the Company continues 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.
Commercial Mortgage Loan Securitization

On May 31, 2016, the Company transferred $259,741 of certain commercial mortgage loans on real estate into a trust. Upon transfer, the loans were securitized as a source of funding for the Company and as a means of transferring the economic risk of the loans to third parties. The securitized assets are legally isolated from the creditors of the Company and are not available to satisfy its obligations. The securitization of the assets was accounted for as a sale. The securitized assets can only be used to settle obligations of the trust. The Company does not have the power to direct the activities of the trust, nor does it provide guarantees or recourse to the trust other than standard representations and warranties. The Company retained an interest in the trust in the form of subordinate securities issued by the trust. The trust is a variable interest entity ("VIE") that the Company does not consolidate.

The cash proceeds, including accrued investment income, from the securitization were $269,828, with a corresponding realized gain of $9,092. At closing, the Company purchased $30,822 of securities at fair value from the trust. As of September 30, 2016, the maximum loss exposure the Company has to the trust is $29,709. The Company calculates its maximum loss exposure based on the unlikely event that all the assets in the trust become worthless and the effect it would have on the Company’s consolidated balance sheets based upon its retained interest in the trust. The securities purchased from the trust are included within fixed maturity securities available for sale at fair value on the consolidated balance sheet and are part of the

21


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




Company’s ongoing other-than-temporary impairment review. See Note 8, Fair Values, Inputs, and Valuation Techniques for Financial Assets and Liabilities Disclosures for further description of the Company’s fair value inputs and valuation techniques.

Variable Interest Entities

A VIE is a legal entity which does not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest. The Company's investments in VIEs include private equity limited partnerships and real estate joint ventures. These investments are generally accounted for under the equity method and included in the consolidated balance sheets in other investments. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet in addition to any required unfunded commitments. As of September 30, 2016, the Company's maximum exposure to loss is $284,379 in recorded carrying value and $67,438 in unfunded commitments. See Commercial Mortgage Loan Securitization section above for the disclosures relating to the commercial mortgage loan securitization trust.

8. 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.
 

22


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(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, 2016 and December 31, 2015. The amounts presented below for 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, modified coinsurance arrangements 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, 2016
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies and
  authorities
$
181,498

 
$

  
 
$
181,498

  
 
$

  
State, municipalities and political subdivisions
520,713

 

  
 
520,713

  
 

  
Foreign governments
623,151

 
1,023

  
 
622,128

  
 

  
Asset-backed
3,818

 

  
 
3,818

  
 

  
Commercial mortgage-backed
41,407

 

  
 
11,647

  
 
29,760

  
Residential mortgage-backed
956,130

 

  
 
956,130

  
 

  
U.S. corporate
5,764,958

 

 
 
5,719,004

 
 
45,954

 
Foreign corporate
1,827,916

 

  
 
1,793,114

  
 
34,802

  
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
20,815

 
20,132

  
 
683

  
 

  
Non-redeemable preferred stocks
429,802

 

  
 
427,502

  
 
2,300

  
Short-term investments
396,598

 
189,759

 
206,839

 

  
Other investments
287,751

 
64,122

 
221,822

 
1,807

Cash equivalents
732,808

 
730,923

 
1,885

 

  
Other assets
9,745

 

  
 
9,453

e
 
292

Assets held in separate accounts
1,695,591

 
1,519,566

 
176,025

 

  
Total financial assets
$
13,492,701

 
$
2,525,525

  
 
$
10,852,261

  
 
$
114,915

  
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
88,406

 
$
64,122

 
$
22

e
 
$
24,262

e
Liabilities related to separate accounts
1,695,591

 
1,519,566

 
176,025

 

   
Total financial liabilities
$
1,783,997

 
$
1,583,688

  
 
$
176,047

   
 
$
24,262

   

 
 

23


Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three and Nine Months Ended September 30, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




 
December 31, 2015
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies and
  authorities
$
154,035

 
$

 
 
$
154,035

 
 
$

 
State, municipalities and political subdivisions
695,630

 

 
 
695,630

 
 

 
Foreign governments
562,250

&#