FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

OR

 

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

For the transition period from                      to                     

 

 

Assurant, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-31978   39-1126612

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

One Chase Manhattan Plaza, 41st Floor

New York, New York 10005

(212) 859-7000

(Address, including zip code, and telephone number, including

area code, of Registrant’s Principal Executive Offices)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨

Indicate by check mark 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    þ       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  þ

The number of shares of the registrant’s Common Stock outstanding at November 2, 2009 was 116,799,796.

 

 

 


Table of Contents

ASSURANT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS

 

Item

Number

        Page
Number
PART I
FINANCIAL INFORMATION

1.

  

Financial Statements of Assurant, Inc.:

  
  

Consolidated Balance Sheets (unaudited) at September 30, 2009 and December 31, 2008

   2
  

Consolidated Statement of Operations (unaudited) for the three and nine months ended September 30, 2009 and 2008

   4
  

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) from December 31, 2008 through September 30, 2009

   5
  

Consolidated Statement of Cash Flows (unaudited) for the nine months ended September 30, 2009 and 2008

   6
  

Notes to Consolidated Financial Statements (unaudited) for the nine months ended September 30, 2009 and 2008

   7

2.

  

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

   41

3.

  

Quantitative and Qualitative Disclosures About Market Risk

   66

4.

  

Controls and Procedures

   66
PART II
OTHER INFORMATION

1.

  

Legal Proceedings

   67

1A.

  

Risk Factors

   67

2.

  

Unregistered Sale of Equity Securities and Use of Proceeds

   67

6.

  

Exhibits

   68
  

Signatures

   69

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

 

1


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2009 and December 31, 2008

 

 

     September 30, 2009    December 31, 2008
     (in thousands except per share and share
amounts)

Assets

     

Investments:

     

Fixed maturity securities available for sale, at fair value (amortized cost - $9,598,085 in 2009 and $9,218,644 in 2008)

   $ 9,964,609    $ 8,631,687

Equity securities available for sale, at fair value (cost - $523,484 in 2009 and $562,940 in 2008)

     502,864      434,452

Commercial mortgage loans on real estate, at amortized cost

     1,449,108      1,506,694

Policy loans

     56,401      58,096

Short-term investments

     445,684      703,402

Collateral held under securities lending

     186,467      234,027

Other investments

     532,860      498,434
             

Total investments

     13,137,993      12,066,792

Cash and cash equivalents

     1,235,851      1,040,684

Premiums and accounts receivable, net

     515,631      513,181

Reinsurance recoverables

     4,083,681      4,010,170

Accrued investment income

     162,824      144,679

Tax receivable

     —        44,156

Deferred income taxes, net

     153,824      449,372

Deferred acquisition costs

     2,555,762      2,650,672

Property and equipment, at cost less accumulated depreciation

     274,646      278,621

Goodwill

     1,009,089      1,001,899

Value of business acquired

     97,992      108,204

Other assets

     498,002      427,347

Assets held in separate accounts

     1,940,283      1,778,809
             

Total assets

   $ 25,665,578    $ 24,514,586
             

See the accompanying notes to the consolidated financial statements

 

2


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2009 and December 31, 2008

 

 

     September 30, 2009     December 31, 2008  
     (in thousands except per share and share
amounts)
 

Liabilities

    

Future policy benefits and expenses

   $ 7,282,280      $ 7,095,645   

Unearned premiums

     5,154,685        5,407,859   

Claims and benefits payable

     3,327,991        3,302,731   

Commissions payable

     233,209        233,200   

Reinsurance balances payable

     62,728        88,393   

Funds held under reinsurance

     58,970        38,433   

Deferred gain on disposal of businesses

     167,006        187,360   

Obligation under securities lending

     197,288        256,506   

Accounts payable and other liabilities

     1,313,693        1,433,028   

Tax payable

     43,804        —     

Debt

     972,032        971,957   

Mandatorily redeemable preferred stock

     8,160        11,160   

Liabilities related to separate accounts

     1,940,283        1,778,809   
                

Total liabilities

     20,762,129        20,805,081   
                

Commitments and contingencies (Note 14)

    

Stockholders’ equity

    

Common stock, par value $0.01 per share, 800,000,000 shares authorized, 116,633,314 and 117,368,534 shares outstanding at September 30, 2009 and December 31, 2008, respectively

     1,447        1,443   

Additional paid-in capital

     2,950,953        2,928,160   

Retained earnings

     3,060,160        2,650,371   

Accumulated other comprehensive income (loss)

     122,361        (670,946

Treasury stock, at cost; 28,119,993 and 26,997,943 shares at September 30, 2009 and December 31, 2008, respectively

     (1,231,472     (1,199,523
                

Total stockholders’ equity

     4,903,449        3,709,505   
                

Total liabilities and stockholders’ equity

   $ 25,665,578      $ 24,514,586   
                

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Consolidated Statement of Operations (unaudited)

Three and Nine Months Ended September 30, 2009 and 2008

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands except number of shares and per share amounts)  

Revenues

        

Net earned premiums and other considerations

   $ 1,874,398      $ 1,984,136      $ 5,624,843      $ 5,921,069   

Net investment income

     172,924        192,314        526,335        591,299   

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

     22,508        (70,057     (9,570     (76,792

Total other-than-temporary impairment losses

     (2,998     (229,148     (31,778     (300,130

Portion of loss (gain) recognized in other comprehensive income, before taxes

     356        —          (617     —     
                                

Net other-than-temporary impairment losses recognized in earnings

     (2,642     (229,148     (32,395     (300,130

Amortization of deferred gain on disposal of businesses

     6,802        7,379        20,354        22,085   

Fees and other income

     82,883        69,911        388,792        223,089   
                                

Total revenues

     2,156,873        1,954,535        6,518,359        6,380,620   
                                

Benefits, losses and expenses

        

Policyholder benefits

     941,145        1,095,048        2,890,889        3,030,715   

Amortization of deferred acquisition costs and value of business acquired

     390,382        422,767        1,176,669        1,253,064   

Underwriting, general and administrative expenses

     601,120        585,050        1,756,841        1,679,254   

Interest expense

     15,160        15,190        45,509        45,765   
                                

Total benefits, losses and expenses

     1,947,807        2,118,055        5,869,908        6,008,798   
                                

Income (loss) before provision (benefit) for income taxes

     209,066        (163,520     648,451        371,822   

Provision (benefit) for income taxes

     64,336        (52,091     229,818        106,467   
                                

Net income (loss)

   $ 144,730      $ (111,429   $ 418,633      $ 265,355   
                                

Earnings Per Share

        

Basic (1)

   $ 1.22      $ (0.94   $ 3.54      $ 2.25   

Diluted (1)

   $ 1.22      $ (0.94   $ 3.54      $ 2.22   

Dividends per share

   $ 0.15      $ 0.14      $ 0.44      $ 0.40   

Share Data

        

Weighted average shares outstanding used in basic per share calculations (1)

     118,184,367        117,985,882        118,187,358        118,132,393   

Plus: Dilutive securities (1)

     107,474        —          74,106        1,142,858   
                                

Weighted average shares used in diluted per share calculations (1)

     118,291,841        117,985,882        118,261,464        119,275,251   
                                

 

(1) Prior period amounts have been adjusted in accordance with the earnings per share guidance on participating securities and the two class method, which is now within the Financial Accounting Standards Board’s Accounting Standards Codification Topic 260, Earnings Per Share. See Notes 3 and 11.

See the accompanying notes to the consolidated financial statements

 

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Assurant, Inc.

Consolidated Statement of Stockholders’ Equity (unaudited)

From December 31, 2008 through September 30, 2009

 

 

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

Balance, December 31, 2008

   $ 1,443    $ 2,928,160      $ 2,650,371      $ (670,946   $ (1,199,523   $ 3,709,505   

Stock plan exercises

     4      6,499        —          —          —          6,503   

Stock plan compensation expense

     —        18,005        —          —          —          18,005   

Change in tax benefit from share-based payment arrangements

     —        (1,711     —          —          —          (1,711

Dividends

     —        —          (51,961     —          —          (51,961

Acquisition of common stock

     —        —          —          —          (31,949     (31,949

Cumulative effect of change in accounting principle, net of taxes of $23,124 (Note 3)

     —        —          43,117        (43,117     —          —     

Comprehensive income:

             

Net income

     —        —          418,633        —          —          418,633   

Other comprehensive income:

             

Net change in unrealized losses on securities, net of taxes of $(360,780)

     —        —          —          762,259        —          762,259   

Net change in other-than-temporary impairment gains recognized in other comprehensive income, net of taxes of $(5,673)

     —        —          —          10,536        —          10,536   

Net change in foreign currency translation, net of taxes of $(13,477)

     —        —          —          58,970        —          58,970   

Amortization of pension and postretirement unrecognized net periodic benefit, net of taxes of $(2,509)

     —        —          —          4,659        —          4,659   
                   

Total other comprehensive income

     —        —          —          —          —          836,424   
                   

Total comprehensive income

     —        —          —          —          —          1,255,057   
                                               

Balance, September 30, 2009

   $ 1,447    $ 2,950,953      $ 3,060,160      $ 122,361      $ (1,231,472   $ 4,903,449   
                                               

See the accompanying notes to the consolidated financial statements

 

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Assurant, Inc.

Consolidated Statement of Cash Flows (unaudited)

Nine Months Ended September 30, 2009 and 2008

 

 

     Nine Months Ended
September 30,
 
     2009     2008  
     (in thousands)  

Net cash provided by operating activities

   $ 213,039      $ 814,371   
                

Investing activities

    

Sales of:

    

Fixed maturity securities available for sale

     825,713        1,727,766   

Equity securities available for sale

     44,437        239,956   

Property and equipment and other

     313        380   

Subsidiary, net of cash transferred

     —          31,853   

Maturities, prepayments, and scheduled redemption of:

    

Fixed maturity securities available for sale

     476,501        445,164   

Purchases of:

    

Fixed maturity securities available for sale

     (1,514,177     (2,046,675

Equity securities available for sale

     (26,621     (314,990

Property and equipment and other

     (38,366     (37,388

Subsidiaries and warranty business, net of cash transferred

     (3,200     (142,689

Change in commercial mortgage loans on real estate

     55,078        (69,004

Change in short-term investments

     261,197        (238,878

Change in other invested assets

     (19,910     (37,072

Change in policy loans

     1,904        (472

Change in collateral held under securities lending

     59,218        179,232   
                

Net cash provided by (used in) investing activities

     122,087        (262,817
                

Financing activities

    

Repayment of mandatorily redeemable preferred stock

     (3,000     (10,000

Change in tax benefit from share-based payment arrangements

     (1,711     5,737   

Acquisition of common stock

     (31,949     (59,000

Dividends paid

     (51,961     (47,203

Change in obligation under securities lending

     (59,218     (185,689
                

Net cash used in financing activities

     (147,839     (296,155
                

Effect of exchange rate changes on cash and cash equivalents

     7,880        (6,684
                

Change in cash and cash equivalents

     195,167        248,715   

Cash and cash equivalents at beginning of period

     1,040,684        804,964   
                

Cash and cash equivalents at end of period

   $ 1,235,851      $ 1,053,679   
                

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

1. Nature of Operations

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

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

Through its operating subsidiaries, the Company provides creditor-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, credit-related insurance, warranties and service contracts, individual health and small employer group health insurance, group dental insurance, group disability insurance, group life insurance and pre-funded funeral insurance.

2. Basis of Presentation

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

The interim financial data as of September 30, 2009 and for the three and nine months ended September 30, 2009 and September 30, 2008 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of the results for the interim periods. The unaudited interim consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2009 presentation.

Effective January 1, 2009, new preneed life insurance policies in which death benefit adjustments are determined at the discretion of the Company are accounted for as universal life contracts under the universal life insurance guidance which is now within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 944, Financial Services - Insurance. For contracts sold prior to January 1, 2009, these preneed life insurance policies were accounted for and will continue to be accounted for under the limited pay insurance guidance, which is also within ASC Topic 944. The change from reporting certain preneed life insurance policies in accordance with the universal life insurance guidance versus the limited pay insurance guidance is not material to the statement of operations or balance sheet.

In accordance with the universal life insurance guidance, income earned on new preneed life insurance policies is presented within policy fee income. Under the limited pay insurance guidance, the consideration received on preneed policies is presented separately as net earned premiums, with policyholder benefits expense being separately disclosed as incurred losses. As previously noted, the effects on net income for the three and nine months ended September 30, 2009 were not material.

Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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, 2008.

3. Recent Accounting Pronouncements

Recent Accounting Pronouncements - Adopted

On July 1, 2009, the Company adopted the new guidance on GAAP, which is now within ASC Topic 105, GAAP. The new guidance establishes a single source of authoritative accounting and reporting guidance recognized by the FASB for nongovernmental entities (the “Codification”). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

References to accounting guidance contained in the Company’s consolidated financial statements and disclosures have been updated to reflect terminology consistent with the Codification. Plain English references to the accounting guidance have been made along with references to the ASC topic number and name.

On January 1, 2009, the Company adopted the revised business combinations guidance, which is now within ASC Topic 805, Business Combinations. The revised guidance retains the fundamental requirements of the previous guidance in that the acquisition method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. The revised guidance expands the definition of transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. The revised guidance broadens the fair value measurement and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations. It also increases the disclosure requirements for business combinations in the consolidated financial statements. The adoption of the revised guidance did not have an impact on the Company’s financial position or results of operations. However, should the Company enter into any business combination in 2009 or beyond, our financial position or results of operations could incur a significantly different impact than had it recorded the acquisition under the previous business combinations guidance. Earnings volatility could result, depending on the terms of the acquisition.

On January 1, 2009, the Company adopted the new consolidations guidance, which is now within ASC Topic 810, Consolidation. The new guidance requires that a noncontrolling interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the noncontrolling interest be presented in the statement of operations. The new guidance also calls for consistency in reporting changes in the parent’s ownership interest in a subsidiary and necessitates fair value measurement of any noncontrolling equity investment retained in a deconsolidation. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations.

On January 1, 2009, the Company applied the fair value measurements and disclosures guidance, which is now within ASC Topic 820, Fair Value Measurements and Disclosures, for all non-financial assets and liabilities measured at fair value on a non-recurring basis. The application of this guidance for those assets and liabilities did not have an impact on the Company’s financial position or results of operations. The Company’s non-financial assets measured at fair value on a non-recurring basis include goodwill and intangible assets. In a business combination, the non-financial assets and liabilities of the acquired company would be measured at fair value in accordance with the fair value measurements and disclosures guidance. The requirements of this guidance include using an exit price based on an orderly transaction between market participants at the measurement date assuming the highest and best use of the asset by market participants. To perform a market valuation, the Company is required to use a market, income or cost approach valuation technique(s). Since the Company performs its annual impairment analyses of goodwill and indefinite-lived intangible assets in the fourth quarter of each year and since there have been no impairment triggers during the first three quarters of 2009, as mentioned above the application of this guidance for all non-financial assets and liabilities measured at fair value on a non-recurring basis did not have an impact on the Company’s financial position or results of operations. However, there may be an impact during 2009 on the Company’s financial position and results of operations when the Company performs an impairment analysis of goodwill and indefinite-lived intangible assets due to the difference in fair value methodology required under this guidance as compared to the previous guidance.

On January 1, 2009, the Company adopted the new earnings per share guidance on participating securities and the two class method, which is now within ASC Topic 260, Earnings Per Share. The new guidance requires unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents to be treated as participating securities. Therefore, the Company’s restricted stock and restricted stock units which have non-forfeitable rights to dividends are included in calculating basic and diluted earnings per share under the two-class method. All prior period earnings per share data presented have been adjusted retrospectively. The adoption of the new guidance did not have a material impact on the Company’s basic and diluted earnings per share calculations for the periods ended September 30, 2009 and 2008. See Note 11 for further information.

On April 1, 2009, the Company adopted the new guidance on determining fair value in illiquid markets, which is now within ASC Topic 820. This new guidance clarifies how to estimate fair value when the volume and level of activity for an asset or liability have significantly decreased. This new guidance also clarifies how to identify circumstances indicating that a transaction is not orderly. Under this new guidance, significant decreases in the volume and level of activity of an asset or liability, in relation to normal market activity, requires further evaluation of transactions or quoted prices and exercise of significant judgment in arriving at fair values. This new guidance also requires additional interim and annual disclosures. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

On April 1, 2009, the Company adopted the new other-than-temporary impairments (“OTTI”) guidance, which is now within ASC Topic 320, Investments – Debt and Equity Securities. This new guidance amends the previous guidance for debt securities and modifies the presentation and disclosure requirements for debt and equity securities. In addition, it amends the requirement for an entity to positively assert the intent and ability to hold a debt security to recovery to determine whether an OTTI exists and replaces this provision with the assertion that an entity does not intend to sell or it is not more likely than not that the entity will be required to sell a security prior to recovery of its amortized cost basis. Additionally, this new guidance modifies the presentation of certain OTTI debt securities to only present the impairment loss within the results of operations that represents the credit loss associated with the OTTI with the remaining impairment loss being presented within other comprehensive (loss) income (“OCI”). At adoption, the Company recorded a cumulative effect adjustment to reclassify the non-credit component of previously recognized OTTI securities which resulted in an increase of $43,117 (after-tax) in retained earnings and a decrease of $43,117 (after-tax) in accumulated OCI (“AOCI”). See Note 4 for further information.

On April 1, 2009, the Company adopted the new fair value of financial instruments guidance, which is now within ASC Topic 825, Financial Instruments. This new guidance requires disclosures about the fair value of financial instruments already required in annual financial statements to be included within interim financial statements. This new guidance also requires disclosure of the methods and assumptions used to estimate fair value. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations. See Note 5 for further information.

On June 30, 2009, the Company adopted the new subsequent events guidance, which is now within ASC Topic 855, Subsequent Events. This new guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance also requires disclosure of the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations. See Note 15.

Recent Accounting Pronouncements - Not Yet Adopted

In December 2008, the FASB issued new guidance on postretirement benefit plan assets, which is now within ASC Topic 715, Compensation – Retirement Benefits. This new guidance will require companies to make additional disclosures about plan assets for defined benefit pension and other postretirement benefit plans. The additional disclosure requirements include how investment allocation decisions are made, the major categories of plan assets and the inputs and valuation techniques used to measure the fair value of plan assets. This new guidance will be effective for fiscal years ending after December 15, 2009. Therefore, the Company is required to adopt this new guidance on December 31, 2009. The adoption of this new guidance will not have an impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued new guidance on transfers of financial assets. The new guidance was issued as Statement of Financial Accounting Standards (“FAS”) No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (“FAS 166”), which has not yet been adopted into Codification. FAS 166 amends the derecognition guidance in FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. FAS 166 is effective for transfers of financial assets occurring in fiscal years beginning after November 15, 2009 and in interim periods within those fiscal years. Therefore, the Company is required to adopt FAS 166 on January 1, 2010. The Company is currently evaluating the requirements of FAS 166 and the potential impact, if any, on the Company’s financial position and results of operations.

In June 2009, the FASB issued new guidance on the accounting for a variable interest entity (“VIE”). The new guidance was issued as FAS No. 167, Amendments to FASB Interpretation No. 46R (“FAS 167”), which has not yet been adopted into Codification. FAS 167 amends the consolidation guidance applicable to VIEs. FAS 167 requires a qualitative assessment in the determination of the primary beneficiary of the VIE. FAS 167 changes the consideration of kick-out rights in determining if an entity is a VIE which may cause certain additional entities to now be considered VIEs. FAS 167 also requires an ongoing reconsideration of the primary beneficiary and amends the events that trigger a reassessment of whether an entity is a VIE. FAS 167 provides two transition alternatives: (i) retrospective application with a cumulative-effect adjustment to retained earnings as of the beginning of the first year

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

adjusted; or (ii) application as of the date of adoption with a cumulative-effect adjustment to retained earnings recognized on that date. FAS 167 is effective as of the beginning of the Company’s first fiscal year beginning after November 15, 2009, and for interim periods within those fiscal years. Therefore, the Company is required to adopt FAS 167 on January 1, 2010. The Company is currently evaluating the requirements of FAS 167 and the potential impact, if any, on the Company’s financial position and results of operations.

In August 2009, the FASB issued new guidance on measuring the fair value of liabilities, which is now within ASC Topic 820. When the quoted price in an active market for an identical liability is not available, this new guidance requires that either the quoted price of the identical or similar liability when traded as an asset or another valuation technique that is consistent with the fair value measurements and disclosures guidance be used to fair value the liability. This new guidance is effective in the first period (including interim periods) beginning after issuance. Therefore, the Company is required to adopt this new guidance on October 1, 2009. The adoption of this new guidance will not have an impact on the Company’s financial position or results of operations.

In September 2009, the FASB issued new guidance on multiple deliverable revenue arrangements, which is now within ASC Topic 605, Revenue Recognition. This new guidance requires entities to use their best estimate of the selling price of a deliverable within a multiple deliverable revenue arrangement if the entity and other entities do not sell the deliverable separate from the other deliverables within the arrangement. This new guidance requires both qualitative and quantitative disclosures. This new guidance will be effective for new or materially modified arrangements in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as of the beginning of a fiscal year. Assuming the Company does not apply the guidance early, the Company is required to adopt this new guidance on January 1, 2011. The Company is currently evaluating the requirements of this new guidance and the potential impact, if any, on the Company’s financial position and results of operations.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

4. Investments

The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and OTTI in AOCI of our fixed maturity and equity securities as of the dates indicated:

 

     September 30, 2009  
     Cost or
Amortized Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair Value    OTTI
in AOCI (1)
 

Fixed maturity securities:

             

United States Government and government agencies and authorities

   $ 112,074    $ 7,262    $ (22   $ 119,314    $ —     

States, municipalities and political subdivisions

     858,652      63,361      (1,647     920,366      —     

Foreign governments

     573,817      28,029      (3,374     598,472      —     

Asset-backed

     52,521      1,808      (926     53,403      (204

Commercial mortgage-backed

     226,875      998      (10,906     216,967      —     

Residential mortgage-backed

     654,404      32,028      (3,775     682,657      (2,030

Corporate

     7,119,742      397,613      (143,925     7,373,430      6,508   
                                     

Total fixed maturity securities

   $ 9,598,085    $ 531,099    $ (164,575   $ 9,964,609    $ 4,274   
                                     

Equity securities:

             

Common stocks

   $ 5,691    $ 288    $ (1,278   $ 4,701    $ —     

Non-redeemable preferred stocks

     517,793      27,264      (46,894     498,163      —     
                                     

Total equity securities

   $ 523,484    $ 27,552    $ (48,172   $ 502,864    $ —     
                                     

 

(1) Represents the amount of other-than-temporary impairment gains (losses) in AOCI, which, from April 1, 2009, were not included in earnings under the new OTTI guidance for debt securities.

 

     December 31, 2008
     Cost or
Amortized Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair Value

Fixed maturity securities:

          

United States Government and government agencies and authorities

   $ 136,725    $ 13,784    $ (22   $ 150,487

States, municipalities and political subdivisions

     874,134      14,122      (14,676     873,580

Foreign governments

     503,620      19,391      (9,693     513,318

Asset-backed

     62,184      157      (2,435     59,906

Commercial mortgage-backed

     241,458      60      (43,415     198,103

Residential mortgage-backed

     677,633      29,670      (1,027     706,276

Corporate

     6,722,890      107,270      (700,143     6,130,017
                            

Total fixed maturity securities

   $ 9,218,644    $ 184,454    $ (771,411   $ 8,631,687
                            

Equity securities:

          

Common stocks

   $ 5,384    $ 283    $ (1,618   $ 4,049

Non-redeemable preferred stocks

     557,556      7,120      (134,273     430,403
                            

Total equity securities

   $ 562,940    $ 7,403    $ (135,891   $ 434,452
                            

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The cost or amortized cost and fair value of fixed maturity securities at September 30, 2009 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 penalties.

 

     Cost or Amortized
Cost
   Fair
Value

Due in one year or less

   $ 256,526    $ 260,909

Due after one year through five years

     2,283,325      2,371,004

Due after five years through ten years

     2,167,489      2,259,306

Due after ten years

     3,956,945      4,120,363
             

Total

     8,664,285      9,011,582

Asset-backed

     52,521      53,403

Commercial mortgaged-backed

     226,875      216,967

Residential mortgage-backed

     654,404      682,657
             

Total

   $ 9,598,085    $ 9,964,609
             

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.

 

     For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
     2009    2008    2009    2008

Proceeds from sales

   $ 452,769    $ 714,533    $ 927,805    $ 1,975,570

Gross realized gains

     23,989      14,950      36,325      51,168

Gross realized losses

     1,913      78,803      41,334      122,421

After a period of declining market values in the fixed maturity and equity security markets, the credit markets have shown continued improvement throughout 2009. This is primarily due to specific U.S. government intervention which resulted in a lower threat of systemic collapse, enhanced liquidity in the market, and improved economic prospects. As a result, many securities in the portfolio have shown improved market values throughout the year.

We recorded net realized gains (losses), including other-than-temporary impairments, in the statement of operations as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

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

        

Fixed maturity securities

   $ 21,290      $ (19,982   $ 17,804      $ (20,988

Equity securities

     836        (43,190     (21,059     (47,546

Commercial mortgage loans on real estate

     —          —          (5,306     952   

Other investments

     382        (428     (1,009     (2,753

Collateral held under securities lending

     —          (6,457     —          (6,457
                                

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

     22,508        (70,057     (9,570     (76,792
                                

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

        

Fixed maturity securities

     (2,631     (108,106     (17,884     (166,676

Equity securities

     (11     (116,901     (14,511     (129,313

Other investments

     —          (4,141     —          (4,141
                                

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

     (2,642     (229,148     (32,395     (300,130
                                

Total net realized gains (losses)

   $ 19,866      $ (299,205   $ (41,965   $ (376,922
                                

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

Other-Than-Temporary Impairments

Adoption of the New OTTI Guidance

On April 1, 2009, the Company adopted the new OTTI guidance, which is now within ASC Topic 320. See Note 3 for further information. The new OTTI guidance 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 the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Prior to April 1, 2009, the Company had to determine whether it had the intent and ability to hold the investment for a sufficient period of time for the value to recover. When the analysis of the above factors resulted in the Company’s conclusion that declines in market values were other-than-temporary, the cost of the securities was written down to market value and the reduction in value was reflected as a realized loss in the statement of operations. Under the new 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 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 were 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.

The new OTTI guidance, required that the Company record, as of April 1, 2009, the date of adoption, a cumulative effect adjustment to reclassify the noncredit component of a previously recognized OTTI from retained earnings to other comprehensive income. For purposes of calculating the cumulative effect adjustment, the Company reviewed OTTI it had recorded through realized losses on securities held at March 31, 2009, which were $188,614, and estimated the portion related to credit losses (i.e., where the present value of cash flows expected to be collected are lower than the amortized cost basis of the security) and the portion related to all other factors. The Company determined that $119,022 of the OTTI previously recorded related to specific credit losses and $69,592 related to all other factors. Under the new OTTI guidance, the Company increased the amortized cost basis of these debt securities by $66,241 and recorded a cumulative effect adjustment, net of tax, in its shareholders’ equity section. The cumulative effect adjustment had no effect on total shareholders’ equity as it increased retained earnings and reduced accumulated other comprehensive (loss) income.

For the three and nine months ended September 30, 2009, the Company recorded $2,998 and $31,778, respectively, of OTTI of which $2,642 and $32,395, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining amounts of $356 and $(617), respectively, related to all other factors and recorded as an unrealized loss (gain) component of AOCI.

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

 

Balance, June 30, 2009

   $ 106,234   

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

     227   

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

     2,404   

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

     (106

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

     (1,906
        

Balance, September 30, 2009

   $ 106,853   
        

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

Beginning balance at April 1, 2009 related to credit losses remaining in retained earnings related to adoption of the new OTTI guidance for debt securities

   $ 119,022   

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

     1,464   

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

     4,641   

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

     (106

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

     (18,168
        

Balance, September 30, 2009

   $ 106,853   
        

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the Balance Sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value.

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

In periods subsequent to the recognition of an other-than-temporary impairment, we generally accrete the discount (or amortize 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.

Realized gains and losses on sales of investments are recognized on the specific identification basis.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The investment categories and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2009 and December 31, 2008 were as follows:

 

     September 30, 2009  
     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

   $ 1,792    $ (22   $ —      $ —        $ 1,792    $ (22

States, municipalities and political subdivisions

     12,626      (1,140     18,337      (507     30,963      (1,647

Foreign governments

     35,935      (1,373     9,189      (2,001     45,124      (3,374

Asset-backed

     42      (1     15,479      (925     15,521      (926

Commercial mortgage-backed

     7,192      (643     123,730      (10,263     130,922      (10,906

Residential mortgage-backed

     10,598      (2,359     6,313      (1,416     16,911      (3,775

Corporate

     232,889      (19,194     1,399,894      (124,731     1,632,783      (143,925
                                             

Total fixed maturity securities

   $ 301,074    $ (24,732   $ 1,572,942    $ (139,843   $ 1,874,016    $ (164,575
                                             

Equity securities:

               

Common stocks

   $ —      $ —        $ 3,494    $ (1,278   $ 3,494    $ (1,278

Non-redeemable preferred stocks

     23,905      (1,672     265,246      (45,222     289,151      (46,894
                                             

Total equity securities

   $ 23,905    $ (1,672   $ 268,740    $ (46,500   $ 292,645    $ (48,172
                                             
      December 31, 2008  
      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

   $ 983    $ (22   $ —      $ —        $ 983    $ (22

States, municipalities and political subdivisions

     361,383      (12,397     27,545      (2,279     388,928      (14,676

Foreign governments

     117,133      (5,853     28,478      (3,840     145,611      (9,693

Asset-backed

     28,524      (384     7,404      (2,051     35,928      (2,435

Commercial mortgage-backed

     120,589      (26,663     74,339      (16,752     194,928      (43,415

Residential mortgage-backed

     6,668      (465     2,303      (562     8,971      (1,027

Corporate

     2,906,093      (372,956     1,343,350      (327,187     4,249,443      (700,143
                                             

Total fixed maturity securities

   $ 3,541,373    $ (418,740   $ 1,483,419    $ (352,671   $ 5,024,792    $ (771,411
                                             

Equity securities:

               

Common stocks

   $ 3,366    $ (1,618   $ —      $ —        $ 3,366    $ (1,618

Non-redeemable preferred stocks

     177,234      (57,723     188,634      (76,550     365,868      (134,273
                                             

Total equity securities

   $ 180,600    $ (59,341   $ 188,634    $ (76,550   $ 369,234    $ (135,891
                                             

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

Total gross unrealized losses represent less than 10% and 17% of the aggregate fair value of the related securities at September 30, 2009 and December 31, 2008, respectively. Approximately 12% and 53% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2009 and December 31, 2008, respectively. The total gross unrealized losses are comprised of 590 and 1,409 individual securities at September 30, 2009 and December 31, 2008, 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, 2009 or December 31, 2008. These conclusions are based on a detailed analysis of the underlying credit and expected cash flows of each security. As of September 30, 2009, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in non-redeemable preferred stocks and in the financial, consumer cyclical and industrial industries of the Company’s corporate fixed maturity securities. For these concentrations, gross unrealized losses of twelve months or more were $141,876, or 76%, of the total. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium. As of September 30, 2009, the Company did not intend to sell the 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.

Securities Lending

The Company engages in transactions in which fixed maturity securities, especially bonds issued by the U.S. government, government agencies and authorities, and U.S. corporations, are loaned to selected broker/dealers. Collateral, greater than or equal to 102% of the fair value of the securities lent, plus accrued interest, is received in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality that are designated as available-for-sale under the debt and equity securities guidance, which is now within ASC Topic 320. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained, as necessary. The Company is subject to the risk of loss to the extent there is a loss on the re-investment of cash collateral.

As of September 30, 2009 and December 31, 2008, our collateral held under securities lending, the use of which is unrestricted, was $186,467 and $234,027, respectively, while our liability to the borrower for collateral received was $197,288 and $256,506, respectively. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of AOCI. The unrealized losses have been in a continuous loss position for twelve months or longer as of September 30, 2009 and December 31, 2008. The Company has actively reduced the size of the securities lending program to mitigate counter-party exposure. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments.

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.

5. Fair Value Disclosures

Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures

The fair value measurements and disclosures guidance, which is now within ASC Topic 820, defines fair value, establishes a framework for measuring fair value, creates a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

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

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The levels of the fair value hierarchy and its application to the Company’s financial assets and liabilities are described below:

 

   

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include certain U.S. mutual funds, money market funds, common stock and certain foreign securities.

 

   

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. Financial assets utilizing Level 2 inputs include corporate, municipal, foreign government and private placement bonds, U.S. Government and agency securities, residential and commercial mortgage-backed securities, asset-backed securities, non-redeemable preferred stocks and certain U.S. and foreign mutual funds.

 

   

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. Financial assets utilizing Level 3 inputs include certain non-redeemable preferred stocks, foreign government and corporate bonds, and commercial mortgage-backed and asset-backed securities that were quoted by brokers and could not be corroborated by Level 2 inputs and derivatives.

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

The following tables present the Company’s fair value hierarchy for those recurring basis assets and liabilities as of September 30, 2009 and December 31, 2008.

 

17


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     September 30, 2009  

Financial Assets

   Total     Level 1     Level 2     Level 3  

Fixed maturity securities:

        

United States Government and government agencies and authorities

   $ 119,314      $ —        $ 119,314      $ —     

State, municipalities and political subdivisions

     920,366        —          920,366        —     

Foreign governments

     598,472        2,999        592,470        3,003   

Asset-backed

     53,403        —          53,394        9   

Commercial mortgage-backed

     216,967        —          187,036        29,931   

Residential mortgage-backed

     682,657        —          682,657        —     

Corporate

     7,373,430        —          7,265,715        107,715   

Equity securities:

        

Common stocks

     4,701        3,496   a      1,205        —     

Non-redeemable preferred stocks

     498,163        —          491,806        6,357   

Short-term investments

     445,684        351,219        94,465        —     

Collateral held under securities lending

     136,467   d      48,475        87,992        —     

Other investments

     252,060   e      55,411   b      192,971   c      3,678   c 

Cash equivalents

     858,732   d      843,259        15,473        —     

Other assets

     9,448   e      —          —          9,448   

Assets held in separate accounts

     1,865,861   d      1,653,691   a      212,170        —     
                                

Total financial assets

   $ 14,035,725      $ 2,958,550      $ 10,917,034      $ 160,141   
                                

Financial Liabilities

                        

Other liabilities

   $ 55,411   e    $ 55,411   b    $ —        $ —     
                                

 

18


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     December 31, 2008  

Financial Assets

   Total     Level 1     Level 2     Level 3  

Fixed maturity securities:

        

United States Government and government agencies and authorities

   $ 150,487      $ —        $ 150,487      $ —     

State, municipalities and political subdivisions

     873,580        —          873,580        —     

Foreign governments

     513,318        2,398        491,522        19,398   

Asset-backed

     59,906        —          59,895        11   

Commercial mortgage-backed

     198,103        —          159,194        38,909   

Residential mortgage-backed

     706,276        —          706,276        —     

Corporate

     6,130,017        —          6,023,335        106,682   

Equity securities:

        

Common stocks

     4,049        3,165   a      884        —     

Non-redeemable preferred stocks

     430,403        —          417,822        12,581   

Short-term investments

     703,402        611,460        91,942        —     

Collateral held under securities lending

     159,028   d      54,192        104,836        —     

Other investments

     239,605   e      56,296   b      176,285   c      7,024   c 

Cash equivalents

     674,390   d      674,390        —          —     

Other assets

     7,080   e      —          —          7,080   

Assets held in separate accounts

     1,701,996   d      1,523,024   a      178,972        —     
                                

Total financial assets

   $ 12,551,640      $ 2,924,925      $ 9,435,030      $ 191,685   
                                

Financial Liabilities

                        

Other liabilities

   $ 56,296   e    $ 56,296   b    $ —        $ —     
                                

 

a

Mainly includes mutual fund investments.

b

Comprised of Assurant Investment Plan (“AIP”), American Security Insurance Company Investment Plan (“ASIC”) and Assurant Deferred Compensation Plan (“ADC”) investments and related liability which are invested in mutual funds.

c

Consists of invested assets associated with a modified coinsurance arrangement.

d

The amounts presented differ from the amounts presented in the consolidated balance sheets because certain cash equivalent investments are not measured at estimated fair value (e.g., certificates of deposit, etc.).

e

The amounts presented differ from the amounts presented in the consolidated balance sheets because only certain assets or liabilities within these line items are measured at estimated fair value (e.g., debt and equity securities and derivatives, etc.).

 

19


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value during the three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended September 30, 2009  
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
   Other
investments
    Other
assets
 
     Foreign
government
    Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-redeemable
preferred
    

Balance, beginning of period

   $ 179,783      $ 14,809      $ 10      $ 30,247      $ 114,963      $ 5,565    $ 4,874      $ 9,315   

Total (losses) gains (realized/unrealized) included in earnings

     (1,007     1,470        (1     16        (2,401     —        1        (92

Net unrealized gains (losses) included in stockholder’s equity

     11,651        1,541        1        1,650        8,425        792      (758     —     

Purchases, issuances, (sales) and (settlements)

     (18,201     (14,817     (1     (222     (3,035     —        (351     225   

Net transfers out

     (12,085     —          —          (1,760     (10,237     —        (88     —     
                                                               

Balance, end of period

   $ 160,141      $ 3,003      $ 9      $ 29,931      $ 107,715      $ 6,357    $ 3,678      $ 9,448   
                                                               

 

     Three Months Ended September 30, 2008  
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
    Other
investments
    Other
assets
 
     Foreign
government
    Asset-
backed
    Commercial
mortgage-
backed
    Residential
mortgage-
backed
    Corporate     Non-redeemable
preferred
     

Balance, beginning of period

   $ 249,328      $ 13,565      $ 13      $ 46,109      $ 19,775      $ 140,818      $ 14,805      $ 9,240      $ 5,003   

Total (losses) gains (realized/unrealized) included in earnings

     (27,986     174        —          (229     —          (26,368     —          (5     (1,558

Net unrealized gains (losses) included in stockholder’s equity

     (3,239     (910     —          (774     —          603        (1,505     (653     —     

Purchases, issuances, (sales) and (settlements)

     (5,286     2,130        (1     3,435        —          (10,790     —          (340     280   

Net transfers in (out)

     2,638        —          —          (2,971     (19,775     21,095        1,883        2,406        —     
                                                                        

Balance, end of period

   $ 215,455      $ 14,959      $ 12      $ 45,570      $ —        $ 125,358      $ 15,183      $ 10,648      $ 3,725   
                                                                        

 

20


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     Nine Months Ended September 30, 2009
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
    Other
investments
    Other
assets
     Foreign
government
    Asset-
backed
    Commercial
mortgage-
backed
    Corporate     Non-redeemable
preferred
     

Balance, beginning of year

   $ 191,685      $ 19,398      $ 11      $ 38,909      $ 106,682      $ 12,581      $ 7,024      $ 7,080

Total (losses) gains (realized/unrealized) included in earnings

     (992     1,844        (1     26        (4,609     —          4        1,744

Net unrealized gains (losses) included in stockholder’s equity

     21,594        (2,018     1        6,534        16,723        850        (496     —  

Purchases, issuances, (sales) and (settlements)

     (5,725     (14,817     (2     (10,637     20,913        —          (1,806     624

Net transfers out

     (46,421     (1,404     —          (4,901     (31,994     (7,074     (1,048     —  
                                                              

Balance, end of period

   $ 160,141      $ 3,003      $ 9      $ 29,931      $ 107,715      $ 6,357      $ 3,678      $ 9,448
                                                              

 

     Nine Months Ended September 30, 2008  
     Total
level 3
assets
    Fixed Maturity Securities     Equity
Securities
    Other
investments
    Other
assets
 
     Foreign
government
    Asset-
backed
    Commercial
mortgage-
backed
    Residential
mortgage-
backed
    Corporate     Non-redeemable
preferred
     

Balance, beginning of period

   $ 282,581      $ 2,993      $ 1,808      $ 44,538      $ —        $ 212,283      $ 7,431      $ 10,368      $ 3,160   

Total (losses) gains (realized/unrealized) included in earnings

     (28,077     273        2        569        —          (27,805     —          11        (1,127

Net unrealized gains (losses) included in stockholder’s equity

     (19,214     (885     (1     (1,471     418        (14,278     (1,892     (1,105     —     

Purchases, issuances, (sales) and (settlements)

     21,274        10,380        (5     9,953        19,357        (21,011     1,940        (1,032     1,692   

Net transfers (out) in

     (41,109     2,198        (1,792     (8,019     (19,775     (23,831     7,704        2,406        —     
                                                                        

Balance, end of period

   $ 215,455      $ 14,959      $ 12      $ 45,570      $ —        $ 125,358      $ 15,183      $ 10,648      $ 3,725   
                                                                        

 

21


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

Three different valuation techniques can be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance, which is now within ASC Topic 820, are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date. Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed to value certain securities without relying exclusively on quoted prices for those securities but comparing those securities to benchmark or comparable securities. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable.

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

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

While not all three approaches are applicable to all financial assets or liabilities, where appropriate, one or more valuation techniques may be used. For all the financial assets and liabilities included in the above hierarchy, excluding derivatives and private placement bonds, the market valuation technique is generally used. For private placement bonds and derivatives, the income valuation technique is generally used. For the period ended September 30, 2009, the application of the valuation technique applied to similar assets and liabilities has been consistent.

Level 1 and Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. The fair value measurements and disclosures guidance, defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs, listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The pricing service also evaluates each security based on relevant market information including: relevant credit information, perceived market movements and sector news. Valuation models can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security. When market observable inputs are unavailable, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources and are categorized as Level 3 securities.

Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:

 

   

There are few recent transactions,

 

   

Little information is released publicly,

 

   

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

 

   

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

 

   

The magnitude of the bid-ask spread.

 

22


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

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

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

Fair Value of Financial Instruments Disclosures

The financial instruments guidance, which is now within ASC Topic 825, requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized in the consolidated balance sheets. However, this guidance excludes certain financial instruments, including those related to insurance contracts and those accounted for under the equity method and joint ventures guidance, which is now within ASC Topic 323, Investments – Equity Method and Joint Ventures (such as real estate joint ventures).

Please refer to the disclosure above for the methods and assumptions used to estimate fair value for the following assets and liabilities:

 

   

Fixed maturity securities

 

   

Equity securities

 

   

Short-term investments

 

   

Other assets

 

   

Other liabilities

Fair values for collateral held and obligations under securities lending, separate account assets (with matching liabilities) and invested assets related to a modified coinsurance arrangement and the AIP, ASIC and ADC are obtained from an independent pricing service which uses observable market information.

In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:

Cash and cash equivalents: the carrying amount reported approximates fair value because of the short maturity of the instruments.

Commercial mortgage loans and policy loans: the fair values of mortgage loans are estimated using discounted cash flow analyses, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts of policy loans reported in the balance sheets approximate fair value.

 

23


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

Other investments: the invested assets related to the modified coinsurance arrangement are classified as trading securities and are reported at their fair values, which are primarily based on matrix pricing models. The invested assets of the AIP, ASIC and ADC are classified as trading securities and are reported at their fair values, which are based on quoted market prices. The carrying amounts of the remaining other investments approximate fair value.

Collateral and obligations under securities lending: the invested assets of the collateral held under securities lending are reported at their estimated fair values, which are primarily based on matrix pricing models and quoted market prices. The obligations under securities lending are reported at the amount received from the selected broker/dealers.

Policy reserves under investment products: the fair values for the Company’s policy reserves under the investment products are determined using discounted cash flow analysis.

Separate account assets and liabilities: separate account assets and liabilities are reported at their estimated fair values, which are primarily based on quoted market prices.

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

Debt: the fair value of debt is based upon quoted market prices.

Mandatorily redeemable preferred stock: the fair value of mandatorily redeemable preferred stock equals the carrying value for all series of mandatorily redeemable preferred stock.

 

24


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The following table demonstrates the carrying value and fair value of our financial assets and liabilities as of September 30, 2009 and December 31, 2008.

 

     September 30, 2009    December 31, 2008
     Carrying Value    Fair Value    Carrying Value    Fair Value

Financial assets

           

Cash and cash equivalents

   $ 1,235,851    $ 1,235,851    $ 1,040,684    $ 1,040,684

Fixed maturity securities

     9,964,609      9,964,609      8,631,687      8,631,687

Equity securities

     502,864      502,864      434,452      434,452

Commercial mortgage loans on real estate

     1,449,108      1,410,377      1,506,694      1,509,923

Policy loans

     56,401      56,401      58,096      58,096

Short-term investments

     445,684      445,684      703,402      703,402

Other investments

     343,466      343,466      339,453      339,453

Other assets

     9,448      9,448      7,080      7,080

Assets held in separate accounts

     1,940,283      1,940,283      1,778,809      1,778,809

Collateral held under securities lending

     186,467      186,467      234,027      234,027

Financial liabilities

           

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

   $ 863,356    $ 760,349    $ 804,883    $ 701,529

Funds held under reinsurance

     58,970      58,970      38,433      38,433

Debt

     972,032      938,254      971,957      769,021

Other liabilities

     55,411      55,411      56,296      56,296

Mandatorily redeemable preferred stocks

     8,160      8,160      11,160      11,160

Liabilities related to separate accounts

     1,940,283      1,940,283      1,778,809      1,778,809

Obligations under securities lending

     197,288      197,288      256,506      256,506

The fair value of the Company’s liabilities for insurance contracts, other than investment-type contracts, are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.

6. Income Taxes

As of December 31, 2008, the Company had a cumulative valuation allowance of $98,793 against deferred tax assets. During the nine months ended September 30, 2009, the Company recognized income tax expense of $601, and other comprehensive income of $31,680. The overall impact to the valuation allowance was a net decrease of $31,079. The decrease in the valuation allowance was primarily related to additional unrealized gains in the Company’s investment portfolio. It is management’s assessment that it is more likely than not that $67,714 of deferred tax assets will not be realized.

The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future GAAP taxable income, the Company has considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax- planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax assets, the valuation allowance may need to be adjusted in the future.

 

25


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

7. Debt

In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000 (the “Senior Notes”). The Company received net proceeds of $971,537 from this transaction, which represents the principal amount less the discount. The discount of $3,463 is being amortized over the life of the Senior Notes and is included as part of interest expense on the statement of operations.

The interest expense incurred related to the Senior Notes was $15,047 for the three months ended September 30, 2009 and 2008, respectively, and $45,141 for the nine months ended September 30, 2009 and 2008, respectively. There was $7,523 of accrued interest at September 30, 2009 and 2008, respectively. The Company made interest payments of $30,094 on February 15, 2009 and 2008 and August 15, 2009 and 2008.

In March 2004, the Company established a $500,000 commercial paper program, which is available for working capital and other general corporate purposes. This program is backed up by a $500,000 senior revolving credit facility which expires in April 2010. There were no amounts relating to the commercial paper program outstanding at September 30, 2009. The Company did not use the revolving credit facility during the nine months ended September 30, 2009 or the twelve months ended December 31, 2008 and no amounts are currently outstanding. The $500,000 senior revolving credit facility contains a $30,000 commitment from Lehman Brothers Bank, FSB (“Lehman”). Based on the financial condition of Lehman, the Company is not relying on Lehman’s commitment.

The revolving credit facility contains restrictive covenants. The terms of the revolving credit facility also require that the Company maintain certain specified minimum ratios and thresholds. Among others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. As of September 30, 2009 the Company was in compliance with all covenants, minimum ratios and thresholds.

 

26


Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

8. Accumulated Other Comprehensive (Loss) Income

The components of accumulated other comprehensive (loss) income, net of tax, at September 30, 2009 are as follows:

 

     Foreign currency
translation

adjustment
    Unrealized
(losses) gains on
securities
    OTTI     Pension
under-
funding
    Accumulated
other
comprehensive
(loss) income
 

Balance at December 31, 2008

   $ (45,944   $ (478,400   $ —        $ (146,602   $ (670,946

Cumulative effect of change in accounting principle (after-tax) (1)

     —          (35,359     (7,758     —          (43,117

Activity in 2009

     58,970        762,259        10,536        4,659        836,424   
                                        

Balance at September 30, 2009

   $ 13,026      $ 248,500      $ 2,778      $ (141,943   $ 122,361   
                                        

 

(1) Related to the adoption of the new OTTI guidance for debt securities. See Notes 3 and 4 for further information.

The amounts in the unrealized (losses) gains on securities column are net of reclassification adjustments of $(27,563), net of tax, for the nine months ended September 30, 2009, for net realized gains (losses) on sales of securities included in net income.

9. Stock Based Compensation

Long-Term Equity Incentive Plan

In May 2008, the shareholders of the Company approved the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”), which authorizes the granting of up to 3,400,000 shares of the Company’s common stock to employees, officers and non-employee directors. Under the ALTEIP, the Company may grant awards based on shares of our common stock, including stock options, stock appreciation rights (“SARs”), restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All future share-based grants will be issued under the ALTEIP.

The Compensation Committee of the Board of Directors (the “Compensation Committee”) has decided to award PSUs and RSUs in 2009. RSUs and PSUs are promises to issue actual shares of common stock at the end of a vesting period or performance period. The RSUs granted to employees under the ALTEIP were based on salary grade and performance and will vest one-third each year over a three-year period. RSUs granted to non-employee directors also vest one-third each year over a three-year period. RSUs receive dividend equivalents in cash during the restricted period and do not have voting rights during the restricted period. PSUs accrue dividend equivalents during the performance period based on a target payout, which will be paid in cash at the end of the performance period based on the actual number of shares issued.

For the PSU portion of an award, the number of shares a participant will receive upon vesting is contingent upon the Company meeting certain pre-established performance goals, identified below, at the end of a three-year performance period. These performance goals will be measured to determine the number of shares a participant will receive. The payout levels can vary between 0% and 150% (maximum) of the target (100%) ALTEIP award amount based on the Company’s level of performance against the pre-established performance goals.

PSU Performance Goals. For 2009, the Compensation Committee has established earnings per share (“EPS”) growth, revenue growth and total stockholder return as the three performance measures for PSU awards. Earnings per share growth is defined as the year-over-year change in GAAP net income divided by average diluted shares outstanding. Revenue growth is defined as year-over-year change in GAAP total revenues as disclosed in the Company’s annual statement of operations. Total stockholder’s return is defined as appreciation in Company stock plus dividend yield to stockholders. The actual payout level is determined by ranking the average of the Company’s performance with respect to all three measures against the average performance of the companies included in the A.M. Best Insurance Index for the relevant period.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

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

Restricted Stock Units

RSUs granted to employees and to non-employee directors were 18,096 and 772,900 for the three and nine months ended September 30, 2009, respectively. The compensation expense recorded related to RSUs was $2,323 and $4,768 for the three and nine months ended September 30, 2009, respectively. The related total income tax benefit recognized was $813 and $1,669 for the three and nine months ended September 30, 2009, respectively. The weighted average grant date fair value for RSUs granted during the nine months ended September 30, 2009 was $20.60.

As of September 30, 2009, there was $10,096 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.57 years.

Performance Share Units

PSUs granted to employees were 631,066 for the nine months ended September 30, 2009. No PSUs were granted during the three months ended September 30, 2009. No compensation expense was recorded for the three months ended September 30, 2009 because both the performance and market-based goals were below minimum payout threshold levels. The compensation expense recorded related to PSUs for the nine months ended September 30, 2009 was $31 and the related total income tax benefit recognized was $11. The weighted average grant date fair value for PSUs granted during the nine months ended September 30, 2009 was $16.32.

As of September 30, 2009, there was no unrecognized compensation cost related to outstanding PSUs.

The fair value of PSUs with market conditions was estimated on the date of grant using a Monte Carlo simulation model, which utilizes multiple variables that determine the probability of satisfying the market condition stipulated in the award. Expected volatilities for awards issued during the nine months ended September 30, 2009 were based on the historical stock prices of the Company’s stock and peer insurance group. The expected term for grants issued during the nine months ended September 30, 2009 was assumed to equal the average of the vesting period of the PSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.

Long-Term Incentive Plan

Prior to the approval of the ALTEIP, share based awards were granted under the 2004 Assurant Long-Term Incentive Plan (“ALTIP”), which authorized the granting of up to 10,000,000 new shares of the Company’s common stock to employees and officers under the ALTIP, Business Value Rights Program (“BVR”) and CEO Equity Grants Program. Under the ALTIP, the Company was authorized to grant restricted stock and SARs. Since May 2008, no new grants have been made under this plan.

Restricted stock granted under the ALTIP vests on a prorated basis over a three year period. SARs granted prior to 2007 under the ALTIP cliff vest as of December 31 of the second calendar year following the calendar year in which the right was granted, and have a five year contractual life. SARs granted in 2007 and through May 2008 cliff vest on the third anniversary from the date the award was granted, and have a five year contractual life. SARs granted under the BVR Program have a three year cliff vesting period. Restricted stock granted under the CEO Equity Grants Program have variable vesting schedules.

Restricted Stock

Restricted stock granted to employees and to non-employee directors were 0 and 12,245 for the three months ended September 30, 2009 and 2008, respectively, and 10,900 and 132,876 for the nine months ended September 30, 2009 and 2008, respectively. The compensation expense recorded related to restricted stock was $998 and $1,778 for the three months ended September 30, 2009 and 2008, respectively, and $3,579 and $5,481 for the nine months ended September 30, 2009 and 2008, respectively. The related total income tax benefit recognized was $349 and $622 for the three months ended September 30, 2009 and 2008, respectively, and $1,253 and $1,721 for the nine months ended September 30, 2009 and 2008, respectively. The weighted average grant date fair value for restricted stock granted during the nine months ended September 30, 2009 and 2008 was $29.77 and $62.96, respectively.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

As of September 30, 2009, there was $2,805 of unrecognized compensation cost related to outstanding restricted stock. That cost is expected to be recognized over a weighted-average period of 0.93 years. The total fair value of restricted stock vested during the three months ended September 30, 2009 and 2008 was $300 and $378, respectively, and $2,210 and $5,833 for the nine months ended September 30, 2009 and 2008, respectively.

Stock Appreciation Rights

There were no SARs granted during the three months ended September 30, 2009 and 2008, and the nine months ended September 30, 2009. Currently there are no plans to award SARs in the future. There were 1,497,891 SARs granted during nine months ended September 30, 2008. The compensation expense recorded related to SARs was $2,693 and $3,643 for the three months ended September 30, 2009 and 2008, respectively, and $7,538 and $10,243 for the nine months ended September 30, 2009 and 2008, respectively. The related total income tax benefit recognized was $943 and $1,275 for the three months ended September 30, 2009 and 2008, respectively, and $2,638 and $3,545 for the nine months ended September 30, 2009 and 2008, respectively. The weighted average grant date fair value for SARs granted during the nine months ended September 30, 2008 was $13.77.

The total intrinsic value of SARs exercised during the three months ended September 30, 2009 and 2008 was $1 and $2,533, respectively. The total intrinsic value of SARs exercised during the nine months ended September 30, 2009 and 2008 was $412 and $38,496, respectively. As of September 30, 2009, there was approximately $10,277 of unrecognized compensation cost related to outstanding SARs. That cost is expected to be recognized over a weighted-average period of 0.98 years.

The fair value of each SAR granted to employees and officers was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities for awards issued during the nine months ended September 30, 2008 were based on the median historical stock price volatility of insurance guideline companies and implied volatilities from traded options on the Company’s stock. The expected term for grants issued during the nine months ended September 30, 2008 was assumed to equal the average of the vesting period of the SARs and the full contractual term of the SARs. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield was based on the current annual dividend and share price as of the grant date.

Directors Compensation Plan

The Company’s Amended and Restated Directors Compensation Plan, as amended, permitted the issuance of up to 500,000 shares of the Company’s common stock to non-employee directors. Since May 2008, all grants issued to directors have been issued from the ALTEIP, discussed above. There were no common shares issued or expense recorded under the Director’s Compensation Plan for the three or nine months ended September 30, 2009 and 2008, respectively.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase shares at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period. The compensation expense recorded related to the ESPP was $46 and $483 for the three months ended September 30, 2009 and 2008, respectively, and $2,089 and $1,334 for the nine months ended September 30, 2009 and 2008, respectively.

In January 2009, the Company issued 133,994 shares to employees at a discounted price of $27.00 for the offering period of July 1, 2008 through December 31, 2008. In January 2008, the Company issued 70,646 shares to employees at a discounted price of $53.45 for the offering period of July 1, 2007 through December 31, 2007.

In July 2009, the Company issued 186,940 shares to employees at a discounted price of $21.68 for the offering period of January 1, 2009 through June 30, 2009. In July 2008, the Company issued 65,841 shares to employees at a discounted price of $59.13 for the offering period of January 1, 2008 through June 30, 2008.

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

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

10. Stock Repurchase

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

 

Period in 2009

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

January

   —        —      —  

February

   —        —      —  

March

   —        —      —  

April

   —        —      —  

May

   —        —      —  

June

   —        —      —  

July

   —        —      —  

August

   863,050    $ 28.45    863,050

September

   259,000      28.54    259,000
                

Total

   1,122,050    $ 28.47    1,122,050
                

On November 10, 2006, the Company’s Board of Directors authorized the Company to repurchase up to $600,000 of its outstanding common stock. During the nine months ended September 30, 2009, the Company repurchased 1,122,050 shares of the Company’s outstanding common stock at a cost of $31,949 and can repurchase up to $170,044 of additional outstanding common stock under the current authorization.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

11. Earnings Per Common Share

In accordance with the earnings per share guidance on participating securities and the two class method, which is now within ASC Topic 260, described in Note 3, restricted stock and RSUs which have non-forfeitable rights to dividends or dividend equivalents are included in calculating basic and diluted earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock according to dividends declared and participation rights in undistributed earnings. All prior period EPS data presented has been adjusted retrospectively.

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009     2008     2009     2008  

Numerator

      

Net income (loss)

   $ 144,730      $ (111,429   $ 418,633      $ 265,355   

Deduct dividends paid

     (17,701     (16,463     (51,961     (47,203
                                

Undistributed earnings

   $ 127,029      $ (127,892   $ 366,672      $ 218,152   
                                

Denominator

      

Weighted average shares outstanding used in basic earnings per share calculations

     118,184,367        117,985,882        118,187,358        118,132,393   

Incremental common shares from :

      

SARs (1)

     107,474        —          74,106        1,137,360   

ESPP (1)

     —          —          —          5,498   
                                

Weighted average shares used in diluted earnings per share calculations

     118,291,841        117,985,882        118,261,464        119,275,251   
                                

Earnings per common share - Basic

      

Distributed earnings

   $ 0.15      $ 0.14      $ 0.44      $ 0.40   

Undistributed earnings

     1.07        (1.08     3.10        1.85   
                                

Net income (loss)

   $ 1.22      $ (0.94   $ 3.54      $ 2.25   
                                

Earnings per common share - Diluted

      

Distributed earnings

   $ 0.15      $ 0.14      $ 0.44      $ 0.40   

Undistributed earnings

     1.07        (1.08     3.10        1.82   
                                

Net income (loss)

   $ 1.22      $ (0.94   $ 3.54      $ 2.22   
                                

 

(1) Per the earnings per share guidance, which is now within ASC Topic 260, no potential common shares are included in the computation of diluted per share amount when a loss from operations exists.

Average SARs totaling 4,080,321 for the three months ended September 30, 2009 and 4,423,605 and 1,065,998 for the nine months ended September 30, 2009 and 2008, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

12. Retirement and Other Employee Benefits

The components of net periodic benefit cost for the Company’s qualified pension benefits plan, nonqualified pension benefits plan and retirement health benefits plan for the three and nine months ended September 30, 2009 and 2008 were as follows:

 

     Qualified Pension
Benefits
    Nonqualified Pension
Benefits (1)
   Retirement Health
Benefits
 
     For the Three Months Ended
September 30,
    For the Three Months Ended
September 30,
   For the Three Months Ended
September 30,
 
     2009     2008     2009     2008    2009     2008  

Service cost

   $ 6,609      $ 5,196      $ 468      $ 481    $ 1,110      $ 626   

Interest cost

     7,562        7,098        1,552        1,572      1,081        958   

Expected return on plan assets

     (8,804     (9,040     —          —        (547     (717

Amortization of prior service cost

     85        717        419        175      417        346   

Amortization of net loss (gain)

     3,689        399        658        299      50        (118

Settlement gain

     —          —          (610     —        —          —     
                                               

Net periodic benefit cost

   $ 9,141      $ 4,370      $ 2,487      $ 2,527    $ 2,111      $ 1,095   
                                               
     Qualified Pension
Benefits
    Nonqualified Pension
Benefits (1)
   Retirement Health
Benefits
 
     For the Nine Months Ended
September 30,
    For the Nine Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
     2009     2008     2009     2008    2009     2008  

Service cost

   $ 17,509      $ 15,796      $ 1,568      $ 1,431    $ 2,460      $ 2,176   

Interest cost

     22,262        20,248        4,752        4,522      3,181        2,858   

Expected return on plan assets

     (26,404     (27,590     —          —        (1,497     (1,317

Amortization of prior service cost

     285        2,167        719        575      1,067        996   

Amortization of net loss (gain)

     3,939        2,499        1,208        999      (50     (118

Settlement (gain) loss

     —          —          (1,159     1,748      —          —     
                                               

Net periodic benefit cost

   $ 17,591      $ 13,120      $ 7,088      $ 9,275    $ 5,161      $ 4,595   
                                               

 

(1) The Company’s nonqualified plans are unfunded.

During the first nine months of 2009, $30,000 in cash was contributed to the qualified pension benefits plan (“Plan”). An additional $10,000 in cash is expected to be contributed to the Plan over the remainder of 2009.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The Benefit Plans Investment Committee of the Company (“Investment Committee”) oversees the investment of the Plan assets and periodically conducts a review of the investment strategies and policies of the Plan. This includes a review of the strategic asset allocation, including the relationship of the Plan liabilities and portfolio structure. The current target asset allocation and their respective ranges are:

 

     Low     Target     High  

Debt securities

   45   50   55

Equity securities (2)

   45   50   55

 

(2) Target asset allocations for equity securities include allocations for alternative investments. We expect to invest certain plan assets in alternative investments, examples of which include funds of hedge funds, private real estate and private equity, during 2009.

Effective January 1, 2009, the Company decided to modify its expected long-term return on plan assets assumption to 7.50% from 8.25%. The Company believes that this revised assumption better reflects the projected return on the invested assets, given the current market conditions and the modified portfolio structure.

13. Segment Information

The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Assurant Solutions provides credit-related insurance, including life, disability and unemployment, debt protection administration services, warranties and service contracts, life insurance policies and annuity products that provide benefits to fund pre-arranged funerals. Assurant Specialty Property provides creditor-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual, short-term and small group health insurance. Assurant Employee Benefits provides employee and employer paid dental, disability, and life insurance products and related services. Corporate & Other includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

The Company evaluates performance of the operating business segments based on after-tax segment income (loss) excluding realized gains (losses) on investments. The Company determines reportable segments in a manner consistent with the way the Company organizes for purposes of making operating decisions and assessing performance.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The following tables summarize selected financial information by segment:

 

     Three Months Ended September 30, 2009
     Solutions    Specialty
Property
   Health     Employee
Benefits
   Corporate &
Other
    Consolidated

Revenues

               

Net earned premiums and other considerations

   $ 669,344    $ 478,701    $ 470,385      $ 255,968    $ —        $ 1,874,398

Net investment income

     97,681      26,550      11,770        33,039      3,884        172,924

Net realized gains on investments

     —        —        —          —        19,866        19,866

Amortization of deferred gain on disposal of businesses

     —        —        —          —        6,802        6,802

Fees and other income

     50,093      15,100      10,140        7,467      83        82,883
                                           

Total revenues

     817,118      520,351      492,295        296,474      30,635        2,156,873
                                           

Benefits, losses and expenses

               

Policyholder benefits

     248,933      156,076      353,412        182,632      92        941,145

Amortization of deferred acquisition costs and value of business acquired

     290,200      88,973      1,428        9,781      —          390,382

Underwriting, general and administrative expenses

     230,017      118,019      146,047        86,748      20,289        601,120

Interest expense

     —        —        —          —        15,160        15,160
                                           

Total benefits, losses and expenses

     769,150      363,068      500,887        279,161      35,541        1,947,807
                                           

Segment income (loss) before provision (benefit) for income tax

     47,968      157,283      (8,592     17,313      (4,906     209,066

Provision (benefit) for income taxes

     16,324      54,126      (3,745     5,863      (8,232     64,336
                                           

Segment income (loss) after tax

   $ 31,644    $ 103,157    $ (4,847   $ 11,450    $ 3,326     
                                       

Net income

                $ 144,730
                   

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     Three Months Ended September 30, 2008  
     Solutions    Specialty
Property
   Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 707,115    $ 513,228    $ 486,700    $ 277,093    $ —        $ 1,984,136   

Net investment income

     105,539      31,129      13,769      35,278      6,599        192,314   

Net realized losses on investments

     —        —        —        —        (299,205     (299,205

Amortization of deferred gain on disposal of businesses

     —        —        —        —        7,379        7,379   

Fees and other income

     40,623      12,501      10,100      6,475      212        69,911   
                                            

Total revenues

     853,277      556,858      510,569      318,846      (285,015     1,954,535   
                                            

Benefits, losses and expenses

                

Policyholder benefits

     295,190      302,105      311,790      185,951      12        1,095,048   

Amortization of deferred acquisition costs and value of business acquired

     326,468      82,731      4,263      9,305      —          422,767   

Underwriting, general and administrative expenses

     201,311      125,788      148,082      90,421      19,448        585,050   

Interest expense

     —        —        —        —        15,190        15,190   
                                            

Total benefits, losses and expenses

     822,969      510,624      464,135      285,677      34,650        2,118,055   
                                            

Segment income (loss) before provision (benefit) for income tax

     30,308      46,234      46,434      33,169      (319,665     (163,520

Provision (benefit) for income taxes

     9,921      15,292      16,230      11,712      (105,246     (52,091
                                            

Segment income (loss) after tax

   $ 20,387    $ 30,942    $ 30,204    $ 21,457    $ (214,419  
                                      

Net (loss)

                 $ (111,429
                      

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     Nine Months Ended September 30, 2009  
     Solutions    Specialty
Property
   Health     Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

               

Net earned premiums and other considerations

   $ 1,980,891    $ 1,450,329    $ 1,411,626      $ 781,997    $ —        $ 5,624,843   

Net investment income

     292,782      84,306      36,320        100,662      12,265        526,335   

Net realized losses on investments

     —        —        —          —        (41,965     (41,965

Amortization of deferred gain on disposal of businesses

     —        —        —          —        20,354        20,354   

Fees and other income

     154,084      42,066      29,901        21,765      140,976        388,792   
                                             

Total revenues

     2,427,757      1,576,701      1,477,847        904,424      131,630        6,518,359   
                                             

Benefits, losses and expenses

               

Policyholder benefits

     782,280      502,043      1,033,016        568,130      5,420        2,890,889   

Amortization of deferred acquisition costs and value of business acquired

     864,295      276,253      7,260        28,861      —          1,176,669   

Underwriting, general and administrative expenses

     640,914      344,072      439,612        260,948      71,295        1,756,841   

Interest expense

     —        —        —          —        45,509        45,509   
                                             

Total benefits, losses and expenses

     2,287,489      1,122,368      1,479,888        857,939      122,224        5,869,908   
                                             

Segment income (loss) before provision (benefit) for income tax

     140,268      454,333      (2,041     46,485      9,406        648,451   

Provision (benefit) for income Taxes

     50,419      155,280      (1,536     15,885      9,770        229,818   
                                             

Segment income (loss) after tax

   $ 89,849    $ 299,053    $ (505   $ 30,600    $ (364  
                                       

Net income

                $ 418,633   
                     
     As of September 30, 2009  

Segment assets:

  

Segment assets, excluding goodwill

   $ 11,204,037    $ 3,264,573    $ 1,059,085      $ 2,464,960    $ 6,663,834      $ 24,656,489   
                                       

Goodwill

       1,009,089   
                     

Total assets

     $ 25,665,578   
                     

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

     Nine Months Ended September 30, 2008  
     Solutions    Specialty
Property
   Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 2,091,237    $ 1,528,569    $ 1,470,485    $ 830,778    $ —        $ 5,921,069   

Net investment income

     320,694      92,501      44,719      112,566      20,819        591,299   

Net realized losses on investments

     —        —        —        —        (376,922     (376,922

Amortization of deferred gain on disposal of businesses

     —        —        —        —        22,085        22,085   

Fees and other income

     132,572      38,090      29,143      20,238      3,046        223,089   
                                            

Total revenues

     2,544,503      1,659,160      1,544,347      963,582      (330,972     6,380,620   
                                            

Benefits, losses and expenses

                

Policyholder benefits

     888,043      618,711      943,859      578,994      1,108        3,030,715   

Amortization of deferred acquisition costs and value of business acquired

     961,729      249,822      13,857      27,656      —          1,253,064   

Underwriting, general and administrative expenses

     544,656      353,878      439,473      270,325      70,922        1,679,254   

Interest expense

     —        —        —        —        45,765        45,765   
                                            

Total benefits, losses and expenses

     2,394,428      1,222,411      1,397,189      876,975      117,795        6,008,798   
                                            

Segment income (loss) before provision (benefit) for income tax

     150,075      436,749      147,158      86,607      (448,767     371,822   

Provision (benefit) for income taxes

     49,776      150,021      51,970      30,188      (175,488     106,467   
                                            

Segment income (loss) after tax

   $ 100,299    $ 286,728    $ 95,188    $ 56,419    $ (273,279  
                                      

Net income

                 $ 265,355   
                      
     As of December 31, 2008  

Segment assets:

  

Segment assets, excluding goodwill

   $ 11,151,178    $ 3,335,130    $ 1,040,761    $ 2,559,065    $ 5,426,553      $ 23,512,687   
                                      

Goodwill

       1,001,899   
                      

Total assets

     $ 24,514,586   
                      

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

14. Commitments and Contingencies

In the normal course of business, the Company issues letters of credit primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. The Company had $29,764 and $29,617 of letters of credit outstanding as of September 30, 2009 and December 31, 2008, respectively.

The Company is involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the Company’s current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, and although no assurances can be given, the Company does not believe that any pending matter will have a material adverse effect, individually or in the aggregate, on the Company’s financial condition, results of operations, or cash flows.

During the three months ended September 30, 2009, the Company recorded a $12,500 charge in the Assurant Health segment related to an unfavorable ruling reached during September 2009 by the South Carolina Supreme Court in a claim-related lawsuit, in the ordinary course, that was originally filed in 2003. The Company is currently pursuing available appellate remedies.

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

Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation, in an effort to resolve these disputes. The disputes involving ARIC and an affiliate, Assurant General Insurance Limited (formerly Bankers Insurance Company Limited) (“AGIL”), for the 1995 and 1996 program years are subject to working group settlements negotiated with other market participants. Negotiations, arbitrations and litigation are still ongoing with respect to the 1997 program year or will be scheduled for the remaining disputes.

As previously disclosed by the Company in a Current Report on Form 8-K, on June 9, 2009, ARIC and AGIL, wholly-owned subsidiaries of the Company, entered into a settlement agreement with Willis Limited, a subsidiary of Willis Group Holdings Limited (“Willis Limited”). The settlement agreement related to an action commenced in 2007 in the English Commercial Court pertaining to the placement of personal accident reinsurance. Under the settlement agreement, Willis Limited agreed to pay ARIC and AGIL a total of $139,000, which the Company recorded in its Corporate and Other reporting segment during the second quarter of 2009.

The Company believes, based on information currently available, that existing loss accruals for remaining arbitrations and lawsuits are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.

As previously disclosed, the Company and certain of its officers and former employees have received subpoenas and requests from the SEC in connection with its investigation by the SEC Staff into certain finite reinsurance contracts entered into by the Company. The Company is cooperating fully and is complying with the requests.

The Company conducted an evaluation of the transactions that could potentially fall within the scope of the subpoenas, as defined by the authorities, and the Company has provided information as requested. On the basis of our investigation, the Company has concluded that there was a verbal side agreement with respect to one of our reinsurers under our catastrophe reinsurance program.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

The contract to which this verbal side agreement applied was accounted for using reinsurance accounting as opposed to deposit accounting. While management believes that the difference resulting from the appropriate alternative accounting treatment would be immaterial to our financial position or results of operations, regulators may reach a different conclusion. In 2004 and 2003, premiums ceded to this reinsurer were $2,600 and $1,500, respectively, and losses ceded were $10,000 and zero, respectively. This contract expired in December 2004 and was not renewed.

In July 2007, the Company learned that each of the following five individuals, Robert B. Pollock, President and Chief Executive Officer, Philip Bruce Camacho, Executive Vice President and Chief Financial Officer, Adam Lamnin, Executive Vice President and Chief Financial Officer of Assurant Solutions/Assurant Specialty Property, Michael Steinman, Senior Vice President and Chief Actuary of Assurant Solutions/Assurant Specialty Property and Dan Folse, Vice President-Risk Management of Assurant Solutions/Assurant Specialty Property, received Wells notices from the SEC in connection with its ongoing investigation. A Wells notice is an indication that the staff of the SEC is considering recommending that the SEC bring a civil enforcement action against the recipient for violating provisions of the federal securities laws. Under SEC procedures, the recipients have the opportunity to respond to the SEC Staff before a formal recommendation is finalized and before the Commissioners themselves consider any recommendations.

On July 17, 2007, the Company announced that the Board of Directors (the “Board”) had placed all five employees on administrative leave, pending further review of this matter. The Board’s actions were based on the recommendations of its Special Committee of non-management directors which thereafter undertook a thorough investigation of the events that had resulted in the receipt of the Wells notices. The Special Committee has reviewed relevant documents, conducted interviews and worked with outside counsel to investigate these matters and to recommend appropriate actions to the Board with respect to the SEC investigation. On August 9, 2007, Messrs. Steinman’s and Folse’s employment with the Company was terminated.

On the basis of an extensive review of evidence concerning this matter and the work of the Special Committee, the Board unanimously voted to reinstate Mr. Pollock as President and Chief Executive Officer, effective January 28, 2008. Effective March 15, 2009, Mr. Camacho resigned from his position as Executive Vice President and Chief Financial Officer of the Company. Starting March 16, 2009, Mr. Camacho began assisting the Company as a consultant for a 12-month transition period. The Board also reinstated Mr. Lamnin who, effective October 12, 2009, began serving as Executive Vice President and Chief Operating Officer of Assurant Health. The Board’s decisions to reinstate Messrs. Pollock and Lamnin and Mr. Camacho’s decision to resign imply no conclusion concerning the outcome of the SEC Staff’s ongoing investigation, and the SEC Staff’s Wells notices to them remain in effect. The SEC Staff’s inquiry continues and the Company cannot predict the duration or outcome of the investigation.

In the course of its response to SEC Staff inquiries, the Company identified certain problems related to its document production process. These production issues have delayed resolution of this matter. The Company believes that it has completed its response to the SEC Staff’s document request.

In relation to the SEC investigation discussed above, the SEC may charge the Company and/or the individuals with violations of the federal securities laws, including alleging violations of Sections 10(b), 13(a), and/or 13(b) of the Securities Exchange Act of 1934, and/or Section 17(a) of the Securities Act of 1933, and may seek civil monetary penalties, injunctive relief and other remedies against the Company and individuals, including potentially seeking a bar preventing one or more individuals from serving as an officer or director of a public company. The SEC may also take the position that the Company should restate its consolidated financial statements to address the accounting treatment referred to above. No settlement of any kind can be reached without approval by the SEC and the Company has not accrued for any civil monetary penalties because the Company cannot reasonably estimate the probability or amount of such penalties at this time.

In the course of implementing procedures for compliance with the new mandatory reporting requirements under the Medicare, Medicaid, and SCHIP Extension Act of 2007, Assurant Health identified a possible ambiguity in the Medicare Secondary Payer Act and related regulations about which the Company has since had a meeting with representatives of the Centers for Medicare and Medicaid Services (“CMS”). Assurant Health believes that its historical interpretation and application of such laws and regulations is correct and has requested that CMS issue a written determination to that effect. CMS is considering the matter and has not made a

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)—(Continued)

Three and Nine Months Ended September 30, 2009 and 2008

(In thousands, except per share and share amounts)

 

 

determination. The Company does not believe that any loss relating to this issue is probable, nor can the Company make any estimate of any possible loss or range of possible loss associated with this issue.

15. Subsequent Events

The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued, which was November 4, 2009, and determined there were none.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands)

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Assurant, Inc. and its subsidiaries (which we refer to collectively as “Assurant”) as of September 30, 2009, compared with December 31, 2008, and our results of operations for the three and nine months ended September 30, 2009 and 2008. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 2008 included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the September 30, 2009 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q.

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

In addition to the factors described in the section below entitled “Critical Factors Affecting Results,” the following risk factors could cause our actual results to differ materially from those currently estimated by management: (i) failure to maintain significant client relationships, distribution sources and contractual arrangements; (ii) failure to attract and retain sales representatives; (iii) deterioration in the Company’s market capitalization compared to its book value that could impair the Company’s goodwill; (iv) negative impact on our business and negative publicity due to unfavorable outcomes in litigation and regulatory investigations (including the potential impact on our reputation and business of a negative outcome in the ongoing SEC investigation); (v) current or new laws and regulations that could increase our costs or limit our growth; (vi) general global economic, financial market and political conditions (including difficult conditions in financial, capital and credit markets, the global economic slowdown, fluctuations in interest rates, mortgage rates, monetary policies, unemployment and inflationary pressure); (vii) inadequacy of reserves established for future claims losses; (viii) failure to predict or manage benefits, claims and other costs; (ix) losses due to natural and man-made catastrophes; (x) increases or decreases in tax valuation allowances; (xi) fluctuations in exchange rates and other risks related to our international operations; (xii) unavailability, inadequacy and unaffordable pricing of reinsurance coverage; (xiii) diminished value of invested assets in our investment portfolio (due to, among other things, the recent volatility in financial markets, the global economic slowdown, credit and liquidity risk, other than temporary impairments, environmental liability exposure and inability to target an appropriate overall risk level); (xiv) inability of reinsurers to meet their obligations; (xv) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance; (xvi) credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions; (xvii) a further decline in the manufactured housing industry; (xviii) a decline in our credit or financial strength ratings (including the risk of ratings downgrades in the insurance industry); (xix) failure to effectively maintain and modernize our information systems; (xx) failure to protect client information and privacy; (xxi) failure to find and integrate suitable acquisitions and new insurance ventures; (xxii) inability of our subsidiaries to pay sufficient dividends; (xxiii) failure to provide for succession of senior management and key executives; and (xxiv) significant competitive pressures in our businesses and cyclicality of the insurance industry. These risk factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. For a more detailed discussion of the risk factors that could affect our actual results, please refer to the “Risk Factors” in Item 1A in our 2008 Annual Report on Form 10-K.

 

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Company Overview

Assurant is a premier provider of specialized insurance products and related services in North America and selected international markets. We have five reportable segments, four of which are operating segments, Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. These operating segments have partnered with clients who are leaders in their industries and have built leadership positions in a number of specialty insurance market segments in the United States of America (“U.S.”) and selected international markets. The Assurant business segments provide creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration services; credit-related insurance including life, disability and unemployment; warranties and service contracts; individual, short-term and small employer group health insurance; group dental insurance; group disability insurance; group life insurance; and pre-funded funeral insurance. Our remaining segment is Corporate & Other which includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

Critical Factors Affecting Results and Liquidity

Our results depend on the adequacy of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Therefore, factors affecting these items, including unemployment, difficult conditions in financial markets and the global economic slowdown, may have a material adverse effect on our results of operations or financial condition. Similarly, the effects of proposed or recently passed government regulation on our sales and profitability is not yet known, but could negatively affect our results of operations or financial condition. For more information on these factors, see “Item 1A—Risk Factors” and “Item 7—MD&A Critical Factors Affecting Results” in our 2008 Annual Report on Form 10-K.

Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months. For the nine months ended September 30, 2009, net cash provided by operating activities totaled $213,039; net cash provided by investing activities totaled $122,087 and net cash used in financing activities totaled $(147,839). We had $1,235,851 in cash and cash equivalents as of September 30, 2009. Please see “—Liquidity and Capital Resources,” below for further details.

Critical Accounting Policies and Estimates

Our 2008 Annual Report on Form 10-K described the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition and liquidity. The accounting policies and estimation process described in the 2008 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for the nine months ended September 30, 2009.

As mentioned in our 2008 Annual Report on Form 10-K, Management considers the valuation and recoverability of goodwill to be a critical accounting policy and estimate. Goodwill and Other Intangible Assets accounting guidance requires that goodwill be tested for impairment at the reporting unit level on an annual basis or between annual tests if an event or circumstances would reasonably likely cause the fair value of the reporting unit to be below its carrying value. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of Management. The Company performs its annual test during the fourth quarter each year. Based on its last annual test, performed during fourth quarter 2008, the Company concluded that goodwill was not impaired. However, due to significant increases in unrealized gains in its investment portfolio, Management determined an interim test was necessary. During the three months ended September 30, 2009, the Company performed the first step of the two-step goodwill impairment test for the two reporting units it considered reasonably likely that their fair values were reduced below their carrying values, Assurant Solutions and Assurant Employee Benefits, due to increases in unrealized gains in their investment portfolios. Based on a fair value determined using both market and income approaches, Management concluded that the fair value was more than the carrying value of each reporting unit, and thus it was not necessary for the Company to perform step two of the impairment test.

Calculating a fair value under the market and income approaches requires Management to use various assumptions and estimates, including but not limited to: forecasted reporting unit revenues, income and dividends, discount rates and exit multiples. If the Company’s assumptions and estimates change, the Company may be required to record an impairment charge for goodwill in future periods, whether in connection with the Company’s next annual impairment testing in fourth quarter 2009, or in a future interim period. Management cannot determine if a future impairment charge may result, since any impairment is dependent on the performance of the respective reporting unit and upon a number of variables which cannot be predicted with certainty. However, if an impairment charge does result in a future period, the non-cash charge may be material.

 

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Additionally, while we did not perform an interim impairment test for our other two reporting units, Assurant Health and Assurant Specialty Property, if economic, political or regulatory factors change, an impairment charge could be required in future periods and a non-cash charge may be material.

 

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Assurant Consolidated

Overview

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

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2009    2008     2009     2008  

Revenues:

         

Net earned premiums and other considerations

   $ 1,874,398    $ 1,984,136      $ 5,624,843      $ 5,921,069   

Net investment income

     172,924      192,314        526,335        591,299   

Net realized losses on investments

     19,866      (299,205     (41,965     (376,922

Amortization of deferred gain on disposal of businesses

     6,802      7,379        20,354        22,085   

Fees and other income

     82,883      69,911        388,792        223,089   
                               

Total revenues

     2,156,873      1,954,535        6,518,359        6,380,620   
                               

Benefits, losses and expenses:

         

Policyholder benefits

     941,145      1,095,048        2,890,889        3,030,715   

Selling, underwriting and general expenses (1)

     991,502      1,007,817        2,933,510        2,932,318   

Interest expense

     15,160      15,190        45,509        45,765   
                               

Total benefits, losses and expenses

     1,947,807      2,118,055        5,869,908        6,008,798   
                               

Income (loss) before provision (benefit) for income taxes

     209,066      (163,520     648,451        371,822   

Provision (benefit) for income taxes

     64,336      (52,091     229,818        106,467   
                               

Net income (loss)

   $ 144,730    $ (111,429   $ 418,633      $ 265,355   
                               

 

(1) Includes amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) and underwriting, general and administrative expenses.

The following discussion provides an analysis of how the consolidated results were affected by our four operating segments and our Corporate and Other segment for the three and nine months ended September 30, 2009 (“Third Quarter 2009” and “Nine Months 2009”, respectively) and three and nine months ended September 30, 2008 (“Third Quarter 2008” and “Nine Months 2008”, respectively). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

For The Three Months Ended September 30, 2009 Compared to The Three Months Ended September 30, 2008.

Net Income

Net income increased $256,159, to $144,730 for Third Quarter 2009 from a net loss of $(111,429) for Third Quarter 2008. The increase was primarily due to net realized losses on investments of $194,483 (after-tax) in Third Quarter 2008 compared with net realized gains on investments of $12,913 (after-tax) in Third Quarter 2009. Third Quarter 2008 net realized losses included other-than-temporary impairments of $148,946 (after-tax) while Third Quarter 2009 only had $1,717 (after-tax). Additionally, Third Quarter 2008 included losses of $86,200 (after-tax) associated with hurricanes Gustav and Ike. The Company incurred no reportable catastrophe losses during Third Quarter 2009.

For The Nine Months Ended September 30, 2009 Compared to The Nine Months Ended September 30, 2008.

Net Income

Net income increased $153,278, or 58%, to $418,633 for Nine Months 2009 from $265,355 for Nine Months 2008. The increase was primarily due to the reasons noted above.

 

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Assurant Solutions

Overview

The tables below present information regarding our Assurant Solutions segment results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues:

        

Net earned premiums and other considerations

   $ 669,344      $ 707,115      $ 1,980,891      $ 2,091,237   

Net investment income

     97,681        105,539        292,782        320,694   

Fees and other income

     50,093        40,623        154,084        132,572   
                                

Total revenues

     817,118        853,277        2,427,757        2,544,503   
                                

Benefits, losses and expenses:

        

Policyholder benefits

     248,933        295,190        782,280        888,043   

Selling, underwriting and general expenses

     520,217        527,779        1,505,209        1,506,385   
                                

Total benefits, losses and expenses

     769,150        822,969  &nb