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ASSURANT INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings "Item 1A-Risk Factors" and "Forward-Looking Statements." General We report our results through five segments: Assurant Solutions,Assurant Specialty Property,Assurant Health , Assurant Employee Benefits, and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held, interest income from excess surplus of insurance subsidiaries not allocated to other segments, run-off Asbestos business, and additional costs associated with excess of loss reinsurance and ceded to certain subsidiaries in theLondon market between 1995 and 1997. The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and LTC, which were sold through reinsurance agreements as described below. The following discussion covers the twelve months endedDecember 31, 2011 ("Twelve Months 2011"), twelve months endedDecember 31, 2010 ("Twelve Months 2010") and twelve months endedDecember 31, 2009 ("Twelve Months 2009"). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations. 38
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Table of Contents Executive Summary Net income increased$266,662 to$545,839 for Twelve Months 2011 from$279,177 for Twelve Months 2010. Twelve Months 2010 included a$306,381 non-cash goodwill impairment charge. Absent this charge, net income decreased$39,719 or 7%. The decline is primarily attributable to decreased net income in ourAssurant Specialty Property segment mainly due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011 and declines in net income at ourAssurant Health and Assurant Employee Benefits segments. Partially offsetting these items was improved net income in our Assurant Solutions segment and an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Assurant Solutions net income increased to$141,553 for Twelve Months 2011 from$103,206 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of$30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Consumer spending remains sluggish in the U.S. and economic uncertainty persists inEurope . However, revenues from our service contract offerings, including wireless, especially inLatin America , are expanding. Client contract renewals remain strong, driven by our ability to respond to evolving customer needs. Preneed sales increased in 2011 compared with 2010, primarily due to our strong relationship with SCI. Total net earned premiums and fees declined slightly in 2011 due to an approximate$160,000 reduction in premiums from the continued run-off of the domestic credit business and service contracts sold through former clients. Overall, modest premium growth is expected in 2012, even with the recent notification of an upcoming loss of a domestic wireless client. We continue to allocate resources to the wireless business due to its potential for growth and its intersection with our core capabilities. Assurant Specialty Property net income decreased$119,222 , to$305,065 for Twelve Months 2011 from$424,287 for Twelve Months 2010. The decline is primarily due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011. There are fewer mortgage loans originating in the U.S. and foreclosures are projected to increase. Despite these trends, our alignment with market leaders, specifically specialty servicers, has allowed us to gain new portfolios, which have helped to offset a decline of loans in the overall marketplace. This was evident during the fourth quarter of 2011 as our clients gained new loan portfolios, mitigating the overall decrease in the number of tracked loans. We placed a significant portion of our reinsurance program inJanuary 2012 , including issuing a new catastrophe bond. The integration of theJune 2011 SureDeposit acquisition has allowed us to expand our product offerings in the multi-family housing market. We expect net earned premiums and fees in 2012 to be consistent with 2011 amounts, reflecting growth in multi-family housing and a modest decline in lender-placed homeowners premiums. As our product mix changes, we anticipate our expense and non-catastrophe loss ratios will rise. Overall results are subject to catastrophe losses, changes in placement rates for lender-placed policies, and mortgage loan origination volume.Assurant Health net income decreased to$40,886 for Twelve Months 2011 from$54,029 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of$27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Our 2011 operating costs dropped significantly due to organizational and operational expense initiatives that will better position us to succeed under health care reform. We have redesigned many of our products in response to health care reform. Sales of lower cost products, offering more limited benefits than traditional major medical insurance, grew in 2011 and we expect that trend to continue in 2012. Our new relationship with Aetna Signature Administrators® broadens the network of health care providers to which our major medical customers have access and improves affordability of those products, while improving engagement with our distributers. We expect this new relationship to improve our major medical sales. Beginning in 2012, any favorable loss development relative to 2011 reserves will increase the MLR rebate liability instead of flowing into earnings as was the case in 2011.
Assurant Employee Benefits net income decreased to
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experience, partially offset by improved dental insurance experience. During the fourth quarter of 2011 our disability incidence rates increased compared with prior years. We expect continued growth in net earned premiums of our voluntary and supplemental products. However, overall growth in our Assurant Employee Benefits business will be challenging in the near term, due to the loss of two DRMS clients and the lack of small employers' payroll growth. Our strategic focus on distribution through key brokers and our expanded offerings continue to improve sales of voluntary, or employee-paid products. In addition, savings from expense initiatives are being redeployed to targeted growth initiatives.
Critical Factors Affecting Results
Our results depend on the appropriateness 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. Factors affecting these items, including unemployment, difficult conditions in financial markets and the global economy, may have a material adverse effect on our results of operations or financial condition. For more information on these factors, see "Item 1A-Risk Factors." Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months including the ability to pay interest on our Senior Notes and dividends on our common stock. For the twelve months endedDecember 31, 2011 , net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled$849,633 ; net cash used in investing activities totaled$196,588 and net cash used in financing activities totaled$636,848 . We had$1,166,713 in cash and cash equivalents as ofDecember 31, 2011 . Please see "-Liquidity and Capital Resources," below for further details. Revenues We generate revenues primarily from the sale of our insurance policies and service contracts and from investment income earned on our investments. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income. Under the universal life insurance guidance, income earned on preneed life insurance policies sold afterJanuary 1, 2009 are presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies sold prior toJanuary 1, 2009 is presented separately as net earned premiums, with policyholder benefits expense being shown separately. Our premium and fee income is supplemented by income earned from our investment portfolio. We recognize revenue from interest payments, dividends and sales of investments. Currently, our investment portfolio is primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates. Interest rate volatility can increase or reduce unrealized gains or losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, fixed maturity and short-term investments. The fair market value of the fixed maturity securities in our investment portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates. We also have investments that carry pre-payment risk, such as mortgage-backed and asset-backed securities. Interest rate fluctuations may cause actual net investment income and/or cash flows from such investments to differ from estimates made at the time of investment. In periods of declining interest rates, 40
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mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Therefore, in these circumstances we may be required to reinvest those funds in lower-interest earning investments.
Expenses
Our expenses are primarily policyholder benefits, selling, underwriting and general expenses and interest expense.
Policyholder benefits are affected by our claims management programs, reinsurance coverage, contractual terms and conditions, regulatory requirements, economic conditions, and numerous other factors. Benefits paid could substantially exceed our expectations, causing a material adverse effect on our business, results of operations and financial condition. Selling, underwriting and general expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred costs, general operating expenses and income taxes.
We incur interest expenses related to our debt and mandatorily redeemable preferred stock, if any.
Critical Accounting Estimates Certain items in our consolidated financial statements are based on estimates and judgment. Differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements. The following critical accounting policies require significant estimates. The actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements. Affordable Care Act The Affordable Care Act was signed into law inMarch 2010 . One provision of the Affordable Care Act, effectiveJanuary 1, 2011 , established a MLR to ensure that a minimum percentage of premiums is paid for clinical services or health care quality improvement activities. The Affordable Care Act established an MLR of 80% for individual and small group business and 85% for large group business. If the actual loss ratios, calculated in a manner prescribed by the HHS, are less than the required MLR, premium rebates are payable to the policyholders byAugust 1 of the subsequent year.The Assurant Health loss ratio reported on page 63 (the "GAAP loss ratio") differs from the loss ratio calculated under the MLR rules ("MLR loss ratio") specified under the Affordable Care Act. The most significant differences include: the MLR loss ratio is calculated separately by state and legal entity; the MLR loss ratio calculation includes credibility adjustments for each entity, which are not applicable to the GAAP loss ratio; the MLR loss ratio calculation applies only to some of our health insurance products, while the GAAP loss ratio applies to the entire portfolio, including products not governed by the Affordable Care Act; the MLR loss ratio includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR loss ratio calculation; and the premium rebate amounts are considered adjustments to premiums for GAAP reporting whereas they are reported as additions to incurred claims in the MLR rebate estimate calculations.Assurant Health has estimated the 2011 impact of this regulation and recorded a premium rebate accrual of$41,589 for Twelve Months 2011. The premium rebate accrual was based on our interpretation of definitions and calculation methodologies outlined in the HHS Interim Final Regulation releasedDecember 1, 2010 , Technical Corrections releasedDecember 29, 2010 and the HHS Final Regulation releasedDecember 7, 2011 . Additionally, the premium rebate accrual was based on separate projection models for the individual medical and 41
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small group businesses using projections of expected premiums, claims, and enrollment by state, legal entity, and market for medical business subject to MLR requirements for the MLR reporting year. In addition, the projection models include quality improvement expenses, state assessments and taxes. We estimated the 2011 full-year premium rebate accrual to be$41,589 ; however, further emerging regulations and interpretations from HHS as well as additional loss experience on claims incurred in 2011 could cause the actual premium rebate to differ. We will not know the actual premium rebate amount with certainty until mid-2012; it will be based on actual premium and claim experience for all of 2011. The estimated liability may also need to be adjusted for any further regulatory clarifications or transition relief granted for states in which we do business. The premium rebate is presented as a reduction of net earned premiums in the consolidated statement of operations and included in unearned premiums in the consolidated balance sheets. Reserves Reserves are established in accordance with GAAP using generally accepted actuarial methods and reflect judgments about expected future claim payments. Calculations incorporate assumptions about inflation rates, the incidence of incurred claims, the extent to which all claims have been reported, future claims processing, lags and expenses and future investment earnings, and numerous other factors. While the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated, the calculation of reserves is not an exact process. Reserves do not represent precise calculations of expected future claims, but instead represent our best estimates at a point in time of the ultimate costs of settlement and administration of a claim or group of claims, based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation. Many of the factors affecting reserve adequacy are not directly quantifiable and not all future events can be anticipated when reserves are established. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of operations in the period in which such estimates are updated. Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that ultimate losses will not exceed existing claim reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made. 42
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The following table provides reserve information for our major product lines for the years ended
December 31, 2011 December 31, 2010 Claims and Benefits Claims and Benefits Payable Payable Future Incurred Future Incurred Policy But Not Policy But Not Benefits and Unearned Case Reported Benefits and Unearned Case Reported Expenses Premiums Reserves Reserves Expenses Premiums Reserves Reserves Long Duration Contracts: Preneed funeral life insurance policies and investment-type annuity contracts $ 3,996,162 $ 120,067 $
11,342
$ 4,085 Life insurance no longer offered 456,860 626 1,428 4,487 467,574 649 1,577
265
Universal life and other products no longer offered 229,726 132 988 6,534 246,177 197 272 8,727 FFG, LTC and other disposed businesses 3,491,994 38,039 641,238 55,151 3,435,762 39,119 546,003 55,089 Medical 86,456 11,097 8,385 10,170 87,588 9,340 7,515 11,044 All other 8,145 249 16,708 6,928 5,621 324 18,465 5,115 Short Duration Contracts: Group term life - 4,277 211,910 37,797 - 4,550 209,514 36,486 Group disability - 2,390 1,243,975 133,441 - 2,567 1,251,999 152,275 Medical - 135,557 97,964 170,970 - 104,169 104,288 186,102 Dental - 4,634 2,788 17,436 - 4,400 3,079 18,063 Property and warranty - 2,041,190 199,829 370,814 - 1,887,759 168,952 349,479 Credit life and disability - 286,631 50,645 59,949 - 307,430 61,808 69,644 Extended service contracts - 2,498,403 2,425 37,398 - 2,363,836 2,855 40,373 All other - 338,725 9,874 18,990 - 260,673 8,211 17,875 Total $ 8,269,343 $ 5,482,017 $ 2,499,499 $ 937,620 $ 8,105,153 $ 5,063,999 $ 2,396,547 $ 954,622
For a description of our reserving methodology, see Note 12 to the Consolidated Financial Statements included elsewhere in this report.
Long Duration Contracts Reserves for future policy benefits represent the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions reflect best estimates for expected investment yield, inflation, mortality, morbidity, expenses and withdrawal rates. These assumptions are based on our experience to the extent it is credible, modified where appropriate to reflect current trends, industry experience and provisions for possible unfavorable deviation. We also record an unearned revenue reserve which represents premiums received which have not yet been recognized in our income statements.
Historically, premium deficiency testing has not resulted in a material adjustment to deferred acquisition costs or reserves except for discontinued products. Such adjustments could occur, however, if economic or mortality conditions significantly deteriorated.
Risks related to the reserves recorded for certain discontinued individual life, annuity, and long-term care insurance policies have been 100% ceded via reinsurance. While the Company has not been released from the contractual obligation to the policyholders, changes in and deviations from economic and mortality assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer. Short Duration Contracts
Claims and benefits payable reserves for short duration contracts include (1) case reserves for known claims which are unpaid as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred
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but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.
Group Disability and Group Term Life
Case or claim reserves are set for active individual claims on group long term disability policies and for waiver of premium benefits on group term life policies. Reserve factors used to calculate these reserves reflect assumptions regarding disabled life mortality and claim recovery rates, claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves. Group long term disability and group term life waiver of premium reserves are discounted because the payment pattern and ultimate cost are fixed and determinable on an individual claim basis. Factors considered when setting IBNR reserves include patterns in elapsed time from claim incidence to claim reporting, and elapsed time from claim reporting to claim payment.
Key sensitivities at
Claims and Claims and Benefits Payable Benefits Payable Group disability, Group disability, claim discount rate decreased termination rate 10% by 100 basis points $ 1,445,636 lower $ 1,414,581 Group disability, as Group disability, as reported $ 1,377,416 reported $ 1,377,416 Group disability, Group disability, claim discount rate increased termination rate 10% by 100 basis points $ 1,315,983 higher $ 1,343,597 The discount rate is also a key sensitivity for group term life waiver of premium reserves. Claims and Benefits Payable Group term life, discount rate decreased by 100 basis points $
258,699
Group term life, as reported $
249,707
Group term life, discount rate increased by 100 basis points $ 241,629 Medical IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for Medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method for recent claim periods. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate loss development factor. The projected claim method is used when development methods do not provide enough data to reliably estimate reserves and utilize expected ultimate loss ratios to calculate the required reserve. Where appropriate, we use variations on each method or a blend of the two. Reserves for our various product lines are calculated using experience data where credible. If sufficient experience data is not available, data from other similar blocks may be used. Industry data provides additional benchmarks when historical experience is too limited. Reserve factors may also be adjusted to reflect considerations not reflected in historical experience, such as changes in claims inventory levels, changes in provider negotiated rates or cost savings initiatives, increasing or decreasing medical cost trends, product changes and demographic changes in the underlying insured population. 44
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Key sensitivities as ofDecember 31, 2011 for medical reserves include claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix. Claims and Benefits
Payable*
Medical, loss development factors 1% lower $
282,934
Medical, as reported $
268,934
Medical, loss development factors 1% higher $ 255,934
* This refers to loss development factors for the most recent four months. Our
historical claims experience indicates that approximately 87% of medical
claims are paid within four months of the incurred date.
Changes in medical loss development may increase or decrease the MLR rebate liability. For more information see Critical Accounting Estimates below.
Property and Warranty Our Property and Warranty lines of business include lender-placed homeowners, manufactured housing homeowners, credit property, credit unemployment and warranty insurance and some longer-tail coverages (e.g. asbestos, environmental, other general liability and personal accident). Claim reserves for these lines are calculated on a product line basis using generally accepted actuarial principles and methods. They consist of case and IBNR reserves. The method we most often use in setting our Property and Warranty reserves is the loss development method. Under this method, we estimate ultimate losses for each accident period by multiplying the current cumulative losses by the appropriate loss development factor. We then calculate the reserve as the difference between the estimate of ultimate losses and the current case-incurred losses (paid losses plus case reserves). We select loss development factors based on a review of historical averages, adjusted to reflect recent trends and business-specific matters such as current claims payment practices. The loss development method involves aggregating loss data (paid losses and case-incurred losses) by accident quarter (or accident year) and accident age for each product or product grouping. As the data ages, we compile loss development factors that measure emerging claim development patterns between reporting periods. By selecting the most appropriate loss development factors, we project the known losses to an ultimate incurred basis for each accident period.
The data is typically analyzed using quarterly paid losses and/or quarterly case-incurred losses. Some product groupings may also use annual paid loss and/or annual case-incurred losses, as well as other actuarially accepted methods.
Each of these data groupings produces an indication of the loss reserves for the product or product grouping. The process to select the best estimate differs by line of business. The single best estimate is determined based on many factors, including but not limited to: • the nature and extent of the underlying assumptions; • the quality and applicability of historical data-whether internal or industry data;
• current and future market conditions-the economic environment will often
impact the development of loss triangles; • the extent of data segmentation-data should be homogeneous yet credible enough for loss development methods to apply; and • the past variability of loss estimates-the loss estimates on some product
lines will vary from actual loss experience more than others. 45
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Most of our credit property and credit unemployment insurance business is either reinsured or written on a retrospective commission basis. Business written on a retrospective commission basis permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years' incurred claims is partially offset by a change in commission expense, which is included in the selling underwriting and general expenses line in our consolidated results of operations. While management has used its best judgment in establishing its estimate of required reserves, different assumptions and variables could lead to significantly different reserve estimates. Two key measures of loss activity are loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be different than management's estimate. The effect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2011 would be as follows:
Change in both loss frequency and Ultimate cost of claims Change in cost of claims severity for all Property and Warranty occurring in 2011
occurring in 2011 3% higher $ 605,395 $ 34,752 2% higher $ 593,697 $ 23,054 1% higher $ 582,113 $ 11,470 Base scenario $ 570,643 $ - 1% lower $ 559,173 $ (11,470 ) 2% lower $ 547,589 $ (23,054 ) 3% lower $ 535,891 $ (34,752 )
Reserving for Asbestos and Other Claims
Our property and warranty line of business includes exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1985. This exposure arose from a contract that we discontinued writing many years ago. We carry case reserves, as recommended by the various pool managers, and IBNR reserves totaling$39,579 (before reinsurance) and$32,229 (net of reinsurance) atDecember 31, 2011 . We believe the balance of case and IBNR reserves for these liabilities are adequate. However, any estimation of these liabilities is subject to greater than normal variation and uncertainty due to the general lack of sufficiently detailed data, reporting delays and absence of a generally accepted actuarial methodology for those exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and what constitutes a claim. In addition, the determination of ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain. However, based on information currently available, and after consideration of the reserves reflected in the consolidated financial statements, we do not believe that changes in reserve estimates for these claims are likely to be material. One of our subsidiaries,American Reliable Insurance Company ("ARIC"), participated in certain excess of loss reinsurance programs in theLondon 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 have sought to void certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Some of the retrocessionaires have sought to avoid certain treaties with ARIC and the other reinsurers and some reinsureds have sought collection of disputed balances under some of the treaties. Disputes under these contracts 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. 46
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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 (formerlyBankers 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 or will be scheduled for the remaining disputes. In the last five years, several settlements have been made relating to the 1995-1997 programs which have reduced ARIC's liabilities significantly. Most notably, in 2010, the loss reserve balance decreased by$18,600 resulting from a$9,200 settlement relating to the 1997 program and settlements made to the 1995 and 1996 programs. In 2011, uncertainty continued to be resolved and the reserve balances were reduced by$3,870 accordingly. Carried case and IBNR reserves total$2,453 as ofDecember 31, 2011 . We believe, based on information currently available, that the amounts accrued are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it difficult to predict outcomes with certainty. DAC Deferred acquisition costs ("DAC") represent expenses incurred in prior periods, primarily for the production of new business, that have been deferred for financial reporting purposes. Acquisition costs primarily consist of commissions, policy issuance expenses, premium tax and certain direct marketing expenses. The DAC asset is tested annually to ensure that future premiums or gross profits are sufficient to support the amortization of the asset. Such testing involves the use of best estimate assumptions to determine if anticipated future policy premiums and investment income are adequate to cover all DAC and related claims, benefits and expenses. To the extent a deficiency exists, it is recognized immediately by a charge to the statement of operations and a corresponding reduction in the DAC asset. If the deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency. Long Duration Contracts Acquisition costs for preneed life insurance policies issued prior toJanuary 1, 2009 and certain discontinued life insurance policies have been deferred and amortized in proportion to anticipated premiums over the premium-paying period. These acquisition costs consist primarily of first year commissions paid to agents and sales and policy issue costs. For preneed investment-type annuities, preneed life insurance policies with discretionary death benefit growth issued afterJanuary 1, 2009 , universal life insurance policies and investment-type annuity contracts that are no longer offered, DAC is amortized in proportion to the present value of estimated gross profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities. Acquisition costs relating to group worksite products, which typically have high front-end costs and are expected to remain in force for an extended period of time, consist primarily of first year commissions to brokers and costs of issuing new certificates. These acquisition costs are front-end loaded, thus they are deferred and amortized over the estimated terms of the underlying contracts. Acquisition costs relating to individual voluntary limited benefit health policies issued in 2007 and later are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions payable under schedules that pay significantly higher rates in the first year. Short Duration Contracts Acquisition costs relating to property contracts, warranty and extended service contracts and single premium credit insurance contracts are amortized over the term of the contracts in relation to premiums earned. 47
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Acquisition costs relating to monthly pay credit insurance business consist mainly of direct marketing costs and are deferred and amortized over the estimated average terms and balances of the underlying contracts.
Acquisition costs relating to group term life, group disability, group dental and group vision consist primarily of compensation to sales representatives. These acquisition costs are front-end loaded; thus, they are deferred and amortized over the estimated terms of the underlying contracts. Investments 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. 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 analyzes 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 its amortized cost and its net present value. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, 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. See also Note 4 to the Consolidated Financial Statements included elsewhere in this report and "Item 1A-Risk Factors-The value of our investments could decline, affecting our profitability and financial strength" and "Investments" contained later in this item. Reinsurance Reinsurance recoverables include amounts we are owed by reinsurers. Reinsurance costs are expensed over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in our consolidated balance sheets. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management's experience and current economic conditions. The ceding of insurance does not discharge our primary liability to our insureds. The following table sets forth our reinsurance recoverables as of the dates indicated:December 31, 2011 December 31, 2010
Reinsurance recoverables $ 5,411,064 $ 4,997,316
We have used reinsurance to exit certain businesses, including blocks of individual life, annuity, and long-term care business. The reinsurance recoverables relating to these dispositions amounted to
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In the ordinary course of business, we are involved in both the assumption and cession of reinsurance with non-affiliated companies. The following table provides details of the reinsurance recoverables balance for the years endedDecember 31 : 2011 2010
Ceded future policyholder benefits and expense
Ceded unearned premium 1,013,778
796,944
Ceded claims and benefits payable 945,900 823,731 Ceded paid losses 51,448 32,575 Total $ 5,411,064 $ 4,997,316 We utilize reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions and Assurant Specialty Property, client risk and profit sharing. See also "Item 1A-Risk Factors-Reinsurance may not be available or adequate to protect us against losses and we are subject to the credit risk of insurers," and "Item 7A-Quantitative and Qualitative Disclosures About Market Risk-Credit Risk."
Retirement and Other Employee Benefits
We sponsor qualified and non-qualified pension plans and a retirement health benefits plan covering our employees who meet specified eligibility requirements. The calculation of reported expense and liability associated with these plans requires an extensive use of assumptions including factors such as discount rates, expected long-term returns on plan assets, employee retirement and termination rates and future compensation increases. We determine these assumptions based upon currently available market and industry data, and historical performance of the plan and its assets. The assumptions we use may differ materially from actual results. See Note 21 to our consolidated financial statements for more information on our retirement and other employee benefits, including a sensitivity analysis for changes in the assumed health care cost trend rates. Contingencies We account for contingencies by evaluating each contingent matter separately. A loss is accrued if reasonably estimable and probable. We establish reserves for these contingencies at the best estimate, or, if no one estimated number within the range of possible losses is more probable than any other, we report an estimated reserve at the low end of the estimated range. Contingencies affecting the Company include litigation matters which are inherently difficult to evaluate and are subject to significant changes. Deferred Taxes Deferred income taxes are recorded for temporary differences between the financial reporting and income tax bases of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. A valuation allowance is established for deferred tax assets if, based on the weight of all available evidence, it is more likely than not that some portion of the asset will not be realized. The valuation allowance is sufficient to reduce the asset to the amount that is more likely than not to be realized. The Company has deferred tax assets resulting from temporary differences that may reduce taxable income in future periods. The detailed components of our deferred tax assets, liabilities and valuation allowance are included in Note 7 to our consolidated financial statements. As ofDecember 31, 2010 , the Company had a cumulative valuation allowance of$90,738 against deferred tax assets. During the year endedDecember 31, 2011 , the Company recognized a cumulative income tax benefit of$80,584 related to the release of a portion of the valuation allowance due to sufficient taxable income of the appropriate character during the period. The$80,584 consists of$80,000 related to capital losses and$584 related to operating losses. As ofDecember 31, 2011 , the Company has a cumulative valuation allowance of$10,154 against deferred tax assets, as it is management's assessment that it is more likely than not that this amount of deferred tax assets will not be realized. 49
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The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carry back or carry forward period. U.S. tax rules mandate that capital losses can only be recovered against capital gains. An example of capital gains would be gains from the sale of investments. The Company's capital loss carryovers were generated in 2008. The company was dependent upon having capital gain income within the next five years in order to use the capital loss carryforward in its entirety. In determining whether the deferred tax asset is realizable, the Company weighed all available evidence, both positive and negative. We considered all sources of taxable income available to realize the asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry back years and tax-planning strategies. The gross deferred tax asset related to net operating loss carryforwards on international subsidiaries is$52,674 . Management believes that it is more likely than not that some of this asset will not be realized in the foreseeable future. Therefore, a cumulative valuation allowance of$9,472 has been recorded as ofDecember 31, 2011 . The Company is dependent on income of the same character in the same jurisdiction to support the deferred tax assets related to net operating loss carryforwards of international subsidiaries.
The Company believes it is more likely than not that the remainder of its deferred tax assets will be realized in the foreseeable future. Accordingly, other than noted herein for certain international subsidiaries, a valuation allowance has not been established.
Future reversal of the valuation allowance will be recognized either when the benefit is realized or when we determine that it is more likely than not that the benefit will be realized. Depending on the nature of the taxable income that results in a reversal of the valuation allowance, and on management's judgment, the reversal will be recognized either through other comprehensive income (loss) or through continuing operations in the statement of operations. Likewise, if the Company determines that it is not more likely than not that it would be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be recorded through a charge to continuing operations in the statement of operations in the period such determination is made. In determining the appropriate valuation allowance, management makes judgments about recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of expected future taxable income and available tax planning strategies. The assumptions used in making these judgments are updated periodically by management based on current business conditions that affect the Company and overall economic conditions. These management judgments are therefore subject to change based on factors that include, but are not limited to, changes in expected capital gain income in the foreseeable future and the ability of the Company to successfully execute its tax planning strategies. Please see "Item 1A-Risk Factors-Risks Related to Our Company-Unanticipated changes in tax provisions or exposure to additional income tax liabilities could materially and adversely affect our results" for more information.
Valuation and Recoverability of Goodwill
Goodwill represented$639,097 and$619,779 of our$27,115,445 and$26,397,018 of total assets as ofDecember 31, 2011 and 2010, respectively. We review our goodwill annually in the fourth quarter for impairment, or more frequently if indicators of impairment exist. Such indicators include, but are not limited to, a sustained significant decline in our market capitalization or a significant decline in our expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements. We have concluded that our reporting units for goodwill testing are equivalent to our operating segments. Therefore, we test goodwill for impairment at the reporting unit level. 50
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The following table illustrates the amount of goodwill carried at each reporting unit: December 31, 2011 2010 Assurant Solutions $ 379,645 $ 379,935 Assurant Specialty Property 259,452 239,844 Assurant Health - - Assurant Employee Benefits - - Total $ 639,097 $ 619,779 During 2011, the Company early adopted the amended intangibles- goodwill and other guidance and applied this guidance as part of its annual goodwill assessment. See Note 2-Recent Accounting Pronouncements-Adopted for further information. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, described below. In the fourth quarter of 2011, the Company chose the option to first perform a qualitative assessment for our Assurant Specialty Property reporting unit. We initially considered the 2010 quantitative analysis performed by the Company whereby it compared the estimated fair value of the Assurant Specialty Property reporting unit with its net book value ("Step 1"). Based on the 2010 Step 1 test, Assurant Specialty Property had an estimated fair value that exceeded its net book value by 62.9%. In undertaking our qualitative assessment, we considered macro-economic, industry and reporting unit-specific factors. These included (i.) the effect of the current interest rate environment on our cost of capital; (ii.) Assurant Specialty Property's sustaining market share over the year; (iii.) lack of turnover in key management; (iv.) 2011 actual performance as compared to expected 2011 performance from our 2010 Step 1 assessment; and, (v.) the overall market position and share price of Assurant, Inc. Based on our qualitative assessment, having considered the factors in totality we determined that it was not necessary to perform a Step 1 quantitative goodwill impairment test for Assurant Specialty Property and that it is more-likely-than-not that the fair value of Assurant Specialty Property continues to exceed its net book value at year-end 2011. Significant changes in the external environment or substantial declines in the operating performance of Assurant Specialty Property could cause us to reevaluate this conclusion in the future. For Assurant Solutions, the Company did not elect the option to perform the qualitative assessment; rather it performed a Step 1 test. Under Step 1, if the estimated fair value of the reporting unit exceeds its net book value, goodwill is deemed not to be impaired, and no further testing is necessary. If the net book value exceeds its estimated fair value, we would then perform a second test to calculate the amount of impairment, if any. To determine the amount of any impairment, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would determine the fair value of all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical calculation that yields the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference. 51
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Following the 2011 Step 1 test, the Company concluded that the estimated fair value of the Assurant Solutions reporting unit exceeded its net book value by 19.2%.
In cases where Step 1 testing was performed, the following describes the valuation methodologies used in 2011, 2010 and 2009 to derive the estimated fair value of the reporting units.
For each reporting unit, we identified a group of peer companies, which have operations that are as similar as possible to the reporting unit. Certain of our reporting units have a very limited number of peer companies. A Guideline Company Method is used to value the reporting unit based upon its relative performance to its peer companies, based on several measures, including price to trailing 12 month earnings, price to projected earnings, price to tangible net worth and return on equity. A Dividend Discount Method ("DDM") is used to value each reporting unit based upon the present value of expected cash flows available for distribution over future periods. Cash flows are estimated for a discrete projection period based on detailed assumptions, and a terminal value is calculated to reflect the value attributable to cash flows beyond the discrete period. Cash flows and the terminal value are then discounted using the reporting unit's estimated cost of capital. The estimated fair value of the reporting unit equals the sum of the discounted cash flows and terminal value. A Guideline Transaction Method values the reporting unit based on available data concerning the purchase prices paid in acquisitions of companies operating in the insurance industry. The application of certain financial multiples calculated from these transactions provides an indication of estimated fair value of the reporting units. While all three valuation methodologies were considered in assessing fair value, the DDM was weighed more heavily since in the current economic environment, management believes that expected cash flows are the most important factor in the valuation of a business enterprise. In addition, recent dislocations in the economy, the scarcity of M&A transactions in the insurance marketplace and the relative lack of directly comparable companies, particularly for Assurant Solutions, make the other methods less credible. Following the 2010 Step 1 test, the Company concluded that the net book values of the Assurant Employee Benefits and Assurant Health reporting units exceeded their estimated fair values. Based on the results of the Step 2 test which is used to determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination, the Company recorded impairment charges of $102,078 and $204,303 related to the Assurant Employee Benefits and Assurant Health reporting units, respectively, representing their entire goodwill asset balances. During 2009, the Company concluded that the net book value of the Assurant Employee Benefits reporting unit exceeded its estimated fair value and recorded an $83,000 impairment charge after performing a Step 2 test. See Note 6 and 11 for further information. The two reporting units that passed the 2010 Step 1 test, Assurant Solutions and Assurant Specialty Property, had estimated fair values that exceeded their net book values by 1.9% and 62.9%, respectively. Assurant Solutions passed the 2010 Step 1 test by a slim margin mainly due to a significant increase in its net book value. The low interest rate environment in 2010 resulted in a significant increase in net unrealized gains in Assurant Solutions' fixed income investments. The determination of fair value of our reporting units requires many estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, earnings and required capital projections discussed above, discount rates, terminal growth rates, operating income and dividend forecasts for each reporting unit and the weighting assigned to the results of each of the three valuation methods described above. Changes in certain assumptions could have a significant impact on the goodwill impairment assessment. For example, an increase of the discount rate of 150 basis points, with all other assumptions held constant, for Assurant Solutions, would result in its estimated fair value being less than its net book value as of December 31, 2011 . Likewise, a reduction of 250 basis points in the terminal growth rate, with all other assumptions held constant, for Assurant Solutions would result in its estimated fair value being less than its net book value as of December 31, 2011 . 52
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We evaluated the significant assumptions used to determine the estimated fair values of Assurant Solutions, both individually and in the aggregate, and concluded they are reasonable. However, should the operating results of the unit decline substantially compared to projected results, or should further interest rate declines further increase the net unrealized investment portfolio gain position, we could determine that we need to record an impairment charge related to goodwill in Assurant Solutions.
Recent Accounting Pronouncements-Adopted
OnDecember 31, 2011 , the Company adopted the new guidance related to the presentation of comprehensive income. This guidance provides two alternatives for presenting comprehensive income. An entity can report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, are displayed under either alternative. The statement(s) are to be presented with equal prominence as the other primary financial statements. The new guidance eliminates the Company's previously applied option to report other comprehensive income and its components in the statement of changes in stockholders' equity. The guidance does not change the items that constitute net income or other comprehensive income, and does not change when an item of other comprehensive income must be reclassified to net income. The Company chose to early adopt this guidance and therefore is reporting comprehensive income in a separate but consecutive statement, with full retrospective application as required by the guidance. The adoption of the new presentation requirements did not have an impact on the Company's financial position or results of operations. OnOctober 1, 2011 , the Company adopted the amended intangibles- goodwill and other guidance. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amended guidance, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company chose to early adopt the revised standard and applied the amended guidance to its fourth quarter annual goodwill impairment test. The adoption of the amended guidance results in a change to the procedures for assessing goodwill impairment and did not have an impact on the Company's financial position or results of operations. See Notes 2 and 10 for more information. OnJanuary 1, 2011 , the Company adopted the new guidance on multiple deliverable revenue arrangements. This 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. In addition, it requires both qualitative and quantitative disclosures. The adoption of this guidance did not have an impact on the Company's financial position or results of operations.
On
OnJanuary 1, 2010 , the Company adopted the guidance on the accounting for a variable interest entity ("VIE"). This guidance amended the consolidation guidance applicable to VIEs to require a qualitative assessment in the determination of the primary beneficiary of the VIE, to require an ongoing reconsideration of the primary beneficiary, to amend the events that trigger a reassessment of whether an entity is a VIE and to change the consideration of kick-out rights in determining if an entity is a VIE. The adoption of this new guidance did not have an impact on the Company's financial position or results of operations.
On
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nongovernmental entities (the "Codification"). The Codification did not change current GAAP, but was 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 were superseded and all other accounting literature not included in the Codification is considered non-authoritative. The adoption of the new guidance did not have an impact on the Company's financial position or results of operations. References to accounting guidance contained in the Company's consolidated financial statements and disclosures have been updated to reflect terminology consistent with the Codification. OnApril 1, 2009 , the Company adopted the OTTI guidance. This guidance amended the previous guidance for debt securities and modified the presentation and disclosure requirements for debt and equity securities. In addition, it amended 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 replaced 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 guidance modified 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 income (loss) ("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 AOCI. See Note 4 for further information. OnJanuary 1, 2009 , the Company adopted the earnings per share guidance on participating securities and the two class method. The 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 years endedDecember 31, 2009 . See Note 23 for further information.
Recent Accounting Pronouncements-Not Yet Adopted
InJuly 2011 , the FASB issued amendments to the other expenses guidance to address how health insurers should recognize and classify in their statements of operations fees mandated by the Affordable Care Act. The Affordable Care Act imposes an annual fee on health insurers for each calendar year beginning on or afterJanuary 1, 2014 . The amendments specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense ratably over the calendar year during which it is payable. The guidance is effective for calendar years beginning afterDecember 31, 2013 , when the fee initially becomes effective. Therefore, the Company is required to adopt this guidance onJanuary 1, 2014 . The Company is currently evaluating the requirements of the amendments and the potential impact on the Company's financial position and results of operations. InMay 2011 , the FASB issued amendments to existing guidance on fair value measurement to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards ("IFRS"). Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements in the fair value accounting guidance. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2011 . Therefore, the Company is required to adopt this guidance onJanuary 1, 2012 . The amendments are to be applied prospectively. The adoption of this amended guidance will not have an impact on the Company's financial position and results of operations. 54
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InOctober 2010 , the FASB issued amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. The amendments modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. Under this amended guidance, acquisition costs are defined as costs that are directly related to the successful acquisition of new or renewal insurance contracts. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2011 . Therefore, the Company is required to adopt this guidance onJanuary 1, 2012 . Prospective application as of the date of adoption is required, however, retrospective application to all prior periods presented upon the date of adoption is permitted, but not required. The Company has chosen to adopt the guidance retrospectively. This will result in a reduction in our deferred acquisition cost asset. It will also cause an increase in our liability for future policy benefits and expenses for certain preneed policies whose reserves are calculated utilizing deferred acquisition costs. There will also be a decrease in the amortization associated with the previously deferred acquisition costs. We are evaluating the full effects of implementing the amended guidance, but we currently estimate that the cumulative effect adjustment that will result from our retrospective adoption will reduce the opening balance of stockholders' equity between$140,000 and $150,000 in the year of adoption, net of the related tax benefit. This estimate is preliminary in nature and the actual amount of the reduction may be above or below the range. We currently estimate the adoption of these amendments will result in immaterial changes in net income in 2011 and in the years preceding 2011 to which the retrospective adoption will be applied. The amendments are generally more restrictive with regard to which costs can be deferred and may impact the pattern of reported income for certain products. Due to our overall mix of business we do not currently expect the amendments to cause material changes to net income. Results of Operations Assurant Consolidated Overview The table below presents information regarding our consolidated results of operations: For the Years Ended December 31, 2011 2010 2009 Revenues:
Net earned premiums and other considerations
689,532 703,190 698,838 Net realized gains (losses) on investments 32,580 48,403 (53,597 ) Amortization of deferred gains on disposal of businesses 20,461 10,406 22,461 Fees and other income 404,863 362,684 482,464 Total revenues 8,272,804 8,527,722 8,700,501 Benefits, losses and expenses: Policyholder benefits 3,755,209 3,640,978 3,867,982 Selling, underwriting and general expenses (1) 3,742,280 3,913,273 3,979,244 Interest expense 60,360 60,646 60,669 Total benefits, losses and expenses 7,557,849
7,614,897 7,907,895
Segment income before provision for income taxes and goodwill impairment 714,955 912,825 792,606 Provision for income taxes 169,116
327,267 279,032
Segment income before goodwill impairment 545,839 585,558 513,574 Goodwill impairment - 306,381 83,000 Net income $ 545,839 $ 279,177 $ 430,574
(1) Includes amortization of DAC and VOBA and underwriting, general and
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Year Ended
Net income increased$266,662 , or 96%, to$545,839 for Twelve Months 2011 from$279,177 for Twelve Months 2010. Twelve Months 2010 included a$306,381 non-cash goodwill impairment charge. Absent this charge, net income decreased$39,719 or 7%. The decline is primarily attributable to decreased net income in our Assurant Specialty Property segment mainly due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011 and declines in net income at ourAssurant Health and Assurant Employee Benefits segments. Partially offsetting these items was improved net income in ourAssurant Solutions segment and an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011.
Year Ended
Net income decreased$151,397 , or 35%, to$279,177 for Twelve Months 2010 from$430,574 for Twelve Months 2009. Twelve Months 2010 includes$107,075 (after-tax) of improved segment results and$66,300 (after-tax) of increased realized gains on investments, compared with Twelve Months 2009. However, results decreased primarily due to a non-cash goodwill impairment charge of$306,381 in Twelve Months 2010 compared with an$83,000 non-cash goodwill impairment charge in Twelve Months 2009. In addition, Twelve Months 2009 includes an$83,542 (after-tax) favorable legal settlement. 56
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Table of Contents Assurant Solutions Overview The table below presents information regarding Assurant Solutions' segment results of operations: For the Years Ended December 31, 2011 2010 2009 Revenues: Net earned premiums and other considerations $ 2,438,407 $ 2,484,299 $ 2,671,041 Net investment income 393,575 397,297 391,229 Fees and other income 265,204 228,052 216,550 Total revenues 3,097,186 3,109,648 3,278,820 Benefits, losses and expenses: Policyholder benefits 852,729
889,387 1,029,151 Selling, underwriting and general expenses (4) 2,025,501 2,052,628 2,055,348
Total benefits, losses and expenses 2,878,230
2,942,015 3,084,499
Segment income before provision for income taxes 218,956 167,633 194,321 Provision for income taxes 77,403 64,427 74,269 Segment net income $ 141,553 $ 103,206 $ 120,052 Net earned premiums and other considerations: Domestic: Credit $ 173,287 $ 189,357 $ 241,293 Service contracts 1,198,510 1,291,725 1,411,953 Other (1) 53,219 49,017 84,939 Total Domestic 1,425,016 1,530,099 1,738,185 International: Credit 391,124 346,475 320,462 Service contracts 495,853 459,166 415,694 Other (1) 24,692 18,001 15,731 Total International 911,669 823,642 751,887 Preneed 101,722 130,558 180,969 Total $ 2,438,407 $ 2,484,299 $ 2,671,041 Fees and other income: Domestic: Debt protection $ 29,501 $ 33,049 $ 40,058 Service contracts 120,896 110,386 102,410 Other (1) 4,123 8,839 18,534 Total Domestic 154,520 152,274 161,002 International 32,059 28,930 27,730 Preneed 78,625 46,848 27,818 Total $ 265,204 $ 228,052 $ 216,550 Gross written premiums (2): Domestic: Credit $ 399,564 $ 422,825 $ 526,532 Service contracts 1,470,605 1,193,423 1,012,670 Other (1) 86,503 65,732 92,111 Total Domestic 1,956,672 1,681,980 1,631,313 International: Credit 1,013,486 968,878 843,225 Service contracts 622,674 523,382 462,964 Other (1) 45,312 22,407 26,567 Total International 1,681,472 1,514,667 1,332,756 Total $ 3,638,144 $ 3,196,647 $ 2,964,069 Preneed (face sales) $ 759,692 $ 734,884 $ 512,366 Combined ratio (3): Domestic 97.4 % 100.5 % 97.2 % International 103.2 % 105.9 % 110.7 %
(1) This includes emerging products and run-off products lines.
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Table of Contents (2) Gross written premiums does not necessarily translate to an equal amount of
subsequent net earned premiums since Assurant Solutions reinsures a portion
of its premiums to insurance subsidiaries of its clients.
(3) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income
excluding the preneed business.
(4) 2010 selling, underwriting and general expenses includes a
asset impairment charge.
Year Ended
Net Income Segment net income increased$38,347 , or 37%, to$141,553 for Twelve Months 2011 from$103,206 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of$30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Absent this item, net income increased$7,399 , or 5%, as a result of improved underwriting experience across our international and domestic service contract businesses. Partially offsetting the improvement was a$4,875 (after-tax) increase to policyholder benefits for unreported claims in our preneed business during fourth quarter 2011 as well as continued reduced earnings from certain domestic blocks of business that are in run-off. Total Revenues Total revenues decreased$12,462 , or less than 1%, to$3,097,186 for Twelve Months 2011 from$3,109,648 for Twelve Months 2010. The decrease was mainly the result of lower net earned premiums of$45,892 , which is primarily attributable to the continued run-off of certain domestic service contract business from former clients that are no longer in business (mainly Circuit City) and the continued run-off of our domestic credit insurance business. Net earned premiums for full year 2011 declined approximately$160,000 from these two sources compared with 2010. Partially offsetting these decreases were new domestic service contract business growth and increases in both our international credit and service contract businesses, which also benefited from the favorable impact of foreign exchange rates. Fees and other income increased$37,152 mainly as a result of increases in our preneed business. Gross written premiums increased$441,497 , or 14%, to$3,638,144 for Twelve Months 2011 from$3,196,647 for Twelve Months 2010. Gross written premiums from our domestic service contract business increased$277,182 primarily due to the 2010 addition of a large new client and an increase in automobile vehicle service contract sales. Our international service contract business increased$99,292 and our international credit business increased$44,608 , primarily due to growth from new and existing clients, particularly inLatin America , and the favorable impact of foreign exchange rates. Partially offsetting these increases was a$23,261 decrease in our domestic credit insurance business, due to the continued run-off of this product line. Preneed face sales increased$24,808 , to$759,692 for Twelve Months 2011 from$734,884 for Twelve Months 2010. This increase was primarily attributable to domestic growth from our exclusive distribution partnership with SCI, the largest funeral provider inNorth America . This exclusive distribution partnership is effective throughSeptember 29, 2014 . Twelve Months 2011 face sales also benefited from recent acquisitions made by SCI. This was partially offset by reduced sales inCanada compared to 2010, when consumer buying increased in advance of a consumer tax rate change that took effectJuly 1, 2010 in certain provinces.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$63,785 , or 2%, to$2,878,230 for Twelve Months 2011 from$2,942,015 for Twelve Months 2010. Policyholder benefits decreased$36,658 primarily due to improved loss experience across our international and domestic service contract businesses and a decrease associated with certain domestic lines of business that are in run-off. Partially offsetting these items was a$7,500 increase to policyholder benefits for unreported claims related to the use of theU.S. Social Security Administration Death Master File to identify deceased policyholders and beneficiaries in our preneed business during fourth quarter 2011. 58
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Selling, underwriting and general expenses decreased$27,127 . Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased$6,430 due to higher earnings in our international business resulting from growth of the business coupled with the unfavorable impact of foreign exchange rates. This was partially offset by lower earnings in our domestic service contract business. General expenses decreased$33,557 primarily due to the above mentioned$47,612 intangible asset impairment charge and from expense management efforts in domestic lines of business that are in run-off. These decreases were partially offset by higher expenses associated with the growth of our international and domestic service contract businesses.
Year Ended
Net Income Segment net income decreased$16,846 , or 14%, to$103,206 for Twelve Months 2010 from$120,052 for Twelve Months 2009 primarily due to an intangible asset impairment charge of$30,948 (after-tax) related to a fourth quarter 2010 client notification of non-renewal of a block of domestic service contract business effectiveJune 1, 2011 . Absent this item, net income increased$14,102 , or 12%, as a result of improved underwriting results in our international and preneed businesses. International results improved primarily due to favorable loss experience in ourU.K. credit insurance business and growth inLatin America . These items were partially offset by decreased underwriting results primarily attributable to the run-off of certain lines of business, and a$6,048 (after-tax) change in the value of our consumer price index caps (derivative instruments that protect against inflation risk in our preneed products). Additionally, Twelve Months 2009 net income included a$10,800 (after-tax) restructuring charge. Total Revenues Total revenues decreased$169,172 , or 5%, to$3,109,648 for Twelve Months 2010 from$3,278,820 for Twelve Months 2009. The decrease was the result of lower net earned premiums of$186,742 , which was primarily attributable to the continued run-off of: certain domestic extended service contract business as earnings from former clients that are no longer in business; preneed policies sold beforeJanuary 1, 2009 ; and domestic credit insurance business. Partially offsetting these decreases was the addition of new domestic service contract business clients and growth in both our international credit and service contracts businesses, which also benefited from the favorable impact of foreign exchange rates. We expect net earned premiums in 2011 to decline$170,000 due to the run-off of domestic credit insurance business and former large extended services contract clients that are no longer in business. Fees and other income improved as a result of increases in preneed business, partially offset by mark-to-market losses associated with our consumer price index caps. Net investment income primarily increased due to the favorable impact of foreign exchange rates. Gross written premiums increased$232,578 , or 8%, to$3,196,647 for Twelve Months 2010 from$2,964,069 for Twelve Months 2009. Gross written premiums from our domestic service contract business increased$180,753 due to the addition of new clients and an increase in automobile vehicle service contracts as automobile sales increased and from premiums reported by certain clients in a timelier manner than in the past. This had no effect on net earned premiums. In addition, consistent with our international expansion strategy, our international credit business increased$125,653 due to growth across several countries from both new and existing clients and from the favorable impact of foreign exchange rates. Gross written premiums from our international service contract business increased$60,418 , primarily due to favorable foreign exchange rates and growth from existing clients, partially offset by lower premiums inDenmark due to our decision to exit that 59
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market in 2009. Gross written premiums from our domestic credit insurance business decreased$103,707 , due to the continued runoff of this product line. Other domestic gross written premiums decreased$26,379 mainly due to a one-time campaign with Ford Motor Company conducted and completed in Second Quarter 2009. Preneed face sales increased$222,518 primarily due to increased consumer buying in advance of a less favorable tax rate change in certain Canadian provinces, as well as growth from our exclusive distribution partnership with SCI the largest funeral provider inNorth America , and increased sales initiatives.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$142,484 , or 5%, to$2,942,015 for Twelve Months 2010 from$3,084,499 for Twelve Months 2009. Policyholder benefits decreased$139,764 primarily due to improved loss experience in ourU.K. credit business and in our domestic service contract business from existing and run-off clients, the run-off of preneed policies sold beforeJanuary 1, 2009 , and the continued run-off of our domestic credit business. Selling, underwriting and general expenses decreased$2,720 . Commissions, taxes, licenses and fees, of which amortization of DAC is a component, decreased$42,585 as commission expense related to our domestic service contract business declined due to lower net earned premiums, partially offset by increased commission expense in our international business due to higher net earned premiums in that business coupled with the unfavorable impact of foreign exchange rates. General expenses increased$39,865 primarily due to the above-mentioned$47,612 (pre-tax) intangible asset impairment charge, the amortization of previously capitalized upfront client commission payments, as we continue to grow our international business and distribution channels, and the unfavorable impact of foreign exchange rates. Partially offsetting these increases was cost savings realized in Twelve Months 2010 as a result of a restructuring in Twelve Months 2009. This restructuring added$16,500 to expenses in Twelve Months 2009. 60
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Table of Contents Assurant Specialty Property Overview
The table below presents information regarding Assurant Specialty Property's segment results of operations:
For the Years Ended December 31, 2011 2010 2009 Revenues: Net earned premiums and other considerations $ 1,904,638 $ 1,953,223 $ 1,947,529 Net investment income 103,259 107,092 110,337 Fees and other income 79,337 69,147 56,890 Total revenues 2,087,234 2,129,462 2,114,756 Benefits, losses and expenses: Policyholder benefits 857,223 684,652 664,182 Selling, underwriting and general expenses 767,761 797,996 832,528 Total benefits, losses and expenses 1,624,984
1,482,648 1,496,710
Segment income before provision for income tax 462,250 646,814 618,046 Provision for income taxes 157,185 222,527 212,049 Segment net income $ 305,065 $ 424,287 $ 405,997 Net earned premiums and other considerations by major product groupings: Homeowners (lender-placed and voluntary) $ 1,274,485 $ 1,342,791 $ 1,369,031 Manufactured housing (lender-placed and voluntary) 216,613 220,309 219,960 Other (1) 413,540 390,123 358,538 Total $ 1,904,638 $ 1,953,223 $ 1,947,529 Ratios: Loss ratio (2) 45.0 % 35.1 % 34.1 % Expense ratio (3) 38.7 % 39.5 % 41.5 % Combined ratio (4) 81.9 % 73.3 % 74.7 %
(1) Primarily includes lender-placed flood, miscellaneous specialty property and
multi-family housing insurance products.
(2) The loss ratio is equal to policyholder benefits divided by net earned
premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
(4) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income.
Year Ended
Net Income Segment net income decreased$119,222 , or 28%, to$305,065 for Twelve Months 2011 from$424,287 for Twelve Months 2010. The decline was primarily due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011. Increased frequency of non-catastrophe weather related losses during Twelve Months 2011 compared with Twelve Months 2010 also contributed to the decline. 61
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Table of Contents Total Revenues Total revenues decreased$42,228 , or 2%, to$2,087,234 for Twelve Months 2011 from$2,129,462 for Twelve Months 2010. Growth in lender-placed homeowners and multi-family housing gross earned premiums was more than offset by increased ceded lender-placed homeowners' premiums and$21,501 in increased catastrophe reinsurance premiums.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased$142,336 , or 10%, to$1,624,984 for Twelve Months 2011 from$1,482,648 for Twelve Months 2010. The loss ratio increased 990 basis points with 710 basis points attributed to$134,881 of increased reportable catastrophe losses in Twelve Months 2011 compared to Twelve Months 2010. Reportable loss events for Twelve Months 2011 included Hurricane Irene, Tropical Storm Lee, wildfires inTexas and severe storms, including tornados in the southeast. The principal causes of loss for these events were wind and flood. Reportable loss events for Twelve Months 2010 includedArizona wind and hailstorms andTennessee storms. Reportable catastrophe losses includes only individual catastrophic events that generated losses to the Company in excess of$5,000 , pre-tax and net of reinsurance. Commissions, taxes, licenses, and fees decreased$37,021 primarily due to client contract changes which resulted in lower commission expense. General expenses increased$6,791 primarily due to increased employee benefit expenses and costs associated with theJune 2011 SureDeposit acquisition including associated intangible asset amortization.
Year Ended
Net Income Segment net income increased$18,290 , or 5%, to$424,287 for Twelve Months 2010 from$405,997 for Twelve Months 2009. The improvement is primarily due to an improved expense ratio as a result of lower commission expense due to increases in client-ceded premiums and operational improvements. Results for Twelve Months 2010 include$14,797 (after tax) of reportable catastrophe losses, including losses fromArizona wind and hailstorms in fourth quarter 2010 andTennessee storms during second quarter 2010. There were no reportable catastrophes during Twelve Months 2009. Total Revenues Total revenues increased$14,706 , or 1%, to$2,129,462 for Twelve Months 2010 from$2,114,756 for Twelve Months 2009. Growth in lender-placed homeowners, lender-placed flood and renters insurance products gross earned premiums and increased fee income were partially offset by increased ceded lender-placed homeowners' premiums and lower real estate owned premiums.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$14,062 , or 1%, to$1,482,648 for Twelve Months 2010 from$1,496,710 for Twelve Months 2009. The decrease was primarily due to lower selling, underwriting, and general expenses of$34,532 compared with Twelve Months 2009, partially offset by increased policyholder benefits of$20,470 . The overall loss ratio increased 100 basis points primarily due to$22,764 of reportable catastrophes in Twelve Months 2010 and the non-recurrence of a$9,023 subrogation reimbursement in Twelve Months 2009. These items are partially offset by lower small-scale weather related losses. Commissions, taxes, licenses and fees decreased$37,676 , primarily due to client contract changes that resulted in lower commission expenses and a release of a premium tax reserve. General expenses increased$3,144 primarily due to increased employee related expenses. 62
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Table of ContentsAssurant Health Overview The table below presents information regardingAssurant Health's segment results of operations: For the Years Ended December 31, 2011 2010 2009 Revenues: Net earned premiums and other considerations $ 1,718,300 $ 1,864,122 $ 1,879,628 Net investment income 45,911 48,540 47,658 Fees and other income 34,635 40,133 39,879 Total revenues 1,798,846 1,952,795 1,967,165 Benefits, losses and expenses: Policyholder benefits 1,271,060
1,302,928 1,410,171 Selling, underwriting and general expenses 460,646 565,060 604,698
Total benefits, losses and expenses 1,731,706
1,867,988 2,014,869
Segment income (loss) before provision for income tax 67,140 84,807 (47,704 ) Provision (benefit) for income taxes 26,254 30,778 (17,484 ) Segment net income (loss) $ 40,886 $ 54,029 $ (30,220 ) Net earned premiums and other considerations: Individual Markets: Individual markets $ 1,286,236 $ 1,375,005 $ 1,374,436 Group markets 473,653 489,117 505,192 Total net earned premiums before premium rebates 1,759,889 1,864,122 1,879,628 Premium rebates (4) (41,589 ) - - Total $ 1,718,300 $ 1,864,122 $ 1,879,628 Covered lives by product line (5): Individual Markets: Individual markets 603 617 646 Group markets 129 144 121 Total 732 761 767 Ratios: Loss ratio (1) 74.0 % 69.9 % 75.0 % Expense ratio (2) 26.3 % 29.7 % 31.5 % Combined ratio (3) 98.8 % 98.1 % 105.0 %
(1) The loss ratio is equal to policyholder benefits divided by net earned
premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
(3) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income.
(4) As of
with the minimum medical loss ratio requirements under the Affordable Care
Act.
(5) As of
supplemental coverages and self-funded group products, purchased by policyholders. Prior periods consisted only of medical policies. 63
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Table of Contents The Affordable Care Act Some provisions of the Affordable Care Act took effect in 2011, and other provisions will become effective at various dates over the next several years. InDecember 2010 , HHS issued a number of interim final regulations with respect to the Affordable Care Act. InDecember 2011 , HHS issued final regulations regarding the MLR. HHS has also issued technical corrections and Q&As throughout 2010 and 2011. However, HHS has not issued guidance regarding specific components of the MLR calculations. The Company has discussed these issues with other industry experts in order to make reasonable assumptions regarding the MLR rebate calculations. However, there remains a risk that HHS will issue new guidance before the 2011 MLR rebate calculations are due to be filed with HHS onJune 1, 2012 . Management continues to modify its business model to adapt to these new regulations and will continue to monitor HHS and state regulatory activity for clarification and additional regulations. Given the sweeping nature of the changes represented by the Affordable Care Act, our results of operations and financial position could be materially adversely affected. For more information, see Item 1A, "Risk Factors-Risk related to our industry-Reform of the health insurance industry could make our health insurance business unprofitable."
Year Ended
Net Income Segment net income decreased$13,143 , or 24%, to$40,886 for Twelve Months 2011 from$54,029 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of$27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Twelve Months 2011 results include$12,900 (after-tax) of favorable reserve development relative to 2010 year-end reserves, a$4,780 (after-tax) reimbursement from a pharmacy services provider related to prior year activity, reduced expenses associated with organizational and operational expense initiatives, and lower commissions due to agent compensation changes and lower sales of new policies. Twelve Months 2010 results included restructuring charges of$8,721 (after-tax) and a$17,421 (after-tax) benefit from a reserve release related to a legal settlement. Total Revenues Total revenues decreased$153,949 , or 8%, to$1,798,846 for Twelve Months 2011 from$1,952,795 for Twelve Months 2010. Net earned premiums and other considerations before premium rebates from our individual markets business decreased$88,769 , or 6%, due to a decline in traditional individual medical product sales, caused by the transition to supplemental and affordable choice products and changes in agent commissions, resulting from the Affordable Care Act. These decreases were partially offset by premium rate increases and increased sales of supplemental and affordable choice products. Net earned premiums and other considerations before rebates from our small employer group business decreased$15,464 , or 3%, due to lower sales and a continued high level of policy lapses, partially offset by premium rate increases. Twelve Months 2011 included a premium rebate accrual of$41,589 associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. There was no premium rebate accrual in Twelve Months 2010 as the MLR requirement was not yet in effect.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$136,282 , or 7%, to$1,731,706 for Twelve Months 2011 from$1,867,988 for Twelve Months 2010. Policyholder benefits decreased$31,868 , or 2%, however, the benefit loss ratio increased to 74.0% from 69.9%. The decrease in policyholder benefits was primarily attributable to favorable reserve development relative to 2010 year-end reserves, a decline in business volume, partially offset by a$26,802 benefit from a reserve release related to a legal settlement in Twelve Months 2010. The increase in the benefit loss ratio was primarily attributable to the inclusion of premium rebates in net earned premiums and other considerations, and a disproportionate decline in benefits in relation to the decrease in net earned premiums 64
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and other considerations. Selling, underwriting and general expenses decreased$104,414 , or 18%, primarily due to reduced employee-related and advertising expenses and reduced commissions due to agent compensation changes and lower sales of new policies.
Year Ended
Net Income (Loss) Segment results increased$84,249 , to net income of$54,029 for Twelve Months 2010 from a net loss of$(30,220) for Twelve Months 2009. The increase is primarily attributable to corrective pricing actions and plan design changes that began in late 2009. Twelve Months 2010 includes a$17,421 (after-tax) benefit from a reserve release related to a legal settlement, while Twelve Months 2009 included charges of$32,370 (after-tax) relating to unfavorable rulings in two claim-related lawsuits, a restructuring charge of$2,925 (after-tax) and H1NI-related medical charges of$2,535 (after-tax). Twelve Months 2010 results were also affected by favorable claim reserve development and reduced expenses associated with expense management initiatives, partially offset by restructuring charges of$8,721 (after-tax). Total Revenues Total revenues decreased$14,370 , or less than 1%, to$1,952,795 for Twelve Months 2010 from$1,967,165 for Twelve Months 2009. Net earned premiums and other considerations from our individual medical business increased$18,983 , or 1%, primarily due to premium rate increases. The effect of the premium rate increases was partially offset by declining members that is resulting from a continued high level of policy lapses and lower sales. Net earned premiums and other considerations from our small employer group business decreased$16,075 , or 3%, due to a continued high level of policy lapses, partially offset by premium rate increases. Short-term medical net earned premiums and other considerations decreased$18,414 , or 18%, due to a reduction in policies sold, partially offset by premium rate increases.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$146,881 , or 7%, to$1,867,988 for Twelve Months 2010 from$2,014,869 for Twelve Months 2009. Policyholder benefits decreased$107,243 , or 8%, and the benefit loss ratio decreased to 69.9% from 75.0%. The decrease was primarily due to a$26,802 benefit from a reserve release related to a legal settlement and favorable claim reserve development during Twelve Months 2010 compared to last year, partially offset by higher estimated claim experience in our small employer group business. Twelve Months 2009 also includes charges of$49,800 relating to unfavorable rulings in two claim-related lawsuits. Selling, underwriting and general expenses decreased$39,638 , or 7%, primarily due to reduced employee-related and advertising expenses, lower amortization of deferred acquisition costs, and reduced commission expense due to lower sales of new policies. Twelve Months 2010 includes restructuring charges of$13,417 that were the result of expense management initiatives to help transition the business for the post-health care reform. Twelve Months 2009 also included a restructuring charge of$4,500 . 65
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Table of Contents Assurant Employee Benefits Overview
The table below presents information regarding Assurant Employee Benefits' segment results of operations:
For the Years Ended December 31, 2011 2010 2009 Revenues: Net earned premiums and other considerations $ 1,064,023 $ 1,101,395 $ 1,052,137 Net investment income 129,640 132,388 133,365 Fees and other income 25,382 25,152 28,343 Total revenues 1,219,045 1,258,935 1,213,845 Benefits, losses and expenses: Policyholder benefits 767,723 766,049 757,070 Selling, underwriting and general expenses 386,013 395,759 392,901 Total benefits, losses and expenses 1,153,736
1,161,808 1,149,971
Segment income before provision for income tax 65,309 97,127 63,874 Provision for income taxes 22,196 33,589 21,718 Segment net income $ 43,113 $ 63,538 $ 42,156 Net earned premiums and other considerations: By major product groupings: Group dental $ 417,145 $ 420,690 $ 425,288 Group disability single premiums for closed blocks (3) 4,936 - - All other group disability 448,028 488,813 434,381 Group life 193,914 191,892 192,468 Total $ 1,064,023 $ 1,101,395 $ 1,052,137 Ratios: Loss ratio (1) 72.2 % 69.6 % 72.0 % Expense ratio (2) 35.4 % 35.1 % 36.4 %
(1) The loss ratio is equal to policyholder benefits divided by net earned
premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
(3) This represents single premium on closed blocks of group disability business.
For closed blocks of business we receive a single, upfront premium and in
turn we record a virtually equal amount of claim reserves. We then manage the
claims using our claim management practices.
Year Ended
Net Income Segment net income decreased 32% to$43,113 for Twelve Months 2011 from$63,538 for Twelve Months 2010. Lower results were primarily attributable to less favorable disability and life insurance loss experience, partially offset by improved dental insurance experience. Twelve Months 2011 results include a decrease in the reserve interest discount rate primarily for new long-term disability claims as well as a$6,630 (after-tax) overall loss and loss adjustment expense reserve release (amounts are included in both policyholders benefits and selling, underwriting and general expenses) related to annual reserve adequacy studies in Twelve Months 2011 compared to$1,829 (after-tax) in Twelve Months 2010. Twelve Months 2010 general expenses included restructuring costs of$4,349 (after-tax). Twelve Months 2011 had no restructuring costs. 66
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Table of Contents Total Revenues. Total revenues decreased$39,890 to$1,219,045 for Twelve Months Ended 2011 from$1,258,935 for Twelve Months Ended 2010. Excluding single premiums, net earned premiums and other considerations decreased$42,308 . The decrease in net earned premiums and other considerations was primarily driven by the loss of policyholders as a result of pricing actions on a block of assumed disability reinsurance business.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$8,072 to$1,153,736 for Twelve Months 2011 from$1,161,808 for Twelve Months 2010. During Twelve Months 2011 policyholder benefits were reduced$10,500 based on the results of our annual reserve adequacy studies compared to$5,758 in Twelve Months 2010. Excluding the impact of the reserve adequacy studies, the loss ratio increased to 73.1% from 70.1%, primarily driven by less favorable loss experience across our disability and life insurance products. Selling, underwriting and general expenses decreased 2% to$386,013 for Twelve Months 2011 from$395,759 for Twelve Months 2010, however the expense ratio increased slightly to 35.4% from 35.1% driven by lower net earned premiums. Twelve Months 2010 included$6,690 in restructuring costs. Twelve Months 2011 had no restructuring costs. In addition, general expenses were$2,644 lower in Twelve Months 2011 compared with Twelve Months 2010 due to our annual reserve adequacy studies. Excluding the restructuring costs and the reserve adequacy adjustment in both years, the expense ratio increased to 35.4% for Twelve Months 2011 from 34.3% for Twelve Months 2010.
Year Ended
Net Income Segment net income increased 51% to$63,538 for Twelve Months 2010 from$42,156 for Twelve Months 2009. The increase in net income was primarily attributable to favorable loss experience in all product lines. Favorable disability results and life mortality, as well as dental pricing actions, contributed to the improvement. Twelve Months 2010 includes restructuring charges of$4,349 (after-tax) compared to restructuring charges of$2,445 (after-tax) in Twelve Months 2009. Total Revenues Total revenues increased 4% to$1,258,935 for Twelve Months 2010 from$1,213,845 for Twelve Months 2009. Net earned premiums increased 5% or$49,258 mainly due to assumed premiums from two new clients in our DRMS distribution channel and the acquisition of a block of business fromShenandoah Life Insurance Company , all added in Fourth Quarter 2009. This was partially offset by decreases in our direct products as a result of a challenging sales and persistency environment which continues to affect revenue growth.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased 1% to$1,161,808 for Twelve Months 2010 from$1,149,971 for Twelve Months 2009. The loss ratio decreased to 69.6% in Twelve Months 2010 from 72.0% in Twelve Months 2009 primarily due to higher net earned premiums and favorable loss experience across the disability, life, and dental products. Disability incidence and life mortality levels continue to be very favorable compared to prior year. The expense ratio decreased to 35.1% for Twelve Months 2010 from 36.4% for Twelve Months 2009 driven by higher net earned premiums and expense management initiatives partially offset by restructuring charges. Twelve Months 2010 includes$6,690 in restructuring charges compared to$3,760 in Twelve Months 2009. 67
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Table of Contents Corporate and Other The table below presents information regarding the Corporate and Other segment's results of operations: For the Years Ended December 31, 2011 2010 2009 Revenues: Net investment income $ 17,147 $ 17,873 $ 16,249 Net realized gains (losses) on investments 32,580 48,403 (53,597 ) Amortization of deferred gains on disposal of businesses 20,461 10,406 22,461 Fees and other income 305 200 140,802 Total revenues 70,493 76,882 125,915 Benefits, losses and expenses: Policyholder benefits 6,474 (2,038 ) 7,408 Selling, underwriting and general expenses 102,359 101,830 93,769 Interest expense 60,360
60,646 60,669
Total benefits, losses and expenses 169,193
160,438 161,846
Segment loss before benefit for income taxes (98,700 ) (83,556 ) (35,931 ) Benefit for income taxes (113,922 ) (24,054 ) (11,520 ) Segment net income (loss) $ 15,222 $ (59,502 ) $ (24,411 )
Year Ended
Net Income (Loss) Segment results increased$74,724 to net income of$15,222 for Twelve Months 2011 compared to a net loss of$(59,502) for Twelve Months 2010. This increase is mainly due to an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Total Revenues Total revenues decreased$6,389 , to$70,493 for Twelve Months 2011 compared with$76,882 for Twelve Months 2010. This decrease is primarily due to a decline of$15,823 in realized gains on investments partially offset by$10,055 of increased amortization of deferred gains on disposal of businesses. During 2010 a portion of the deferred gain liability was re-established resulting from refinements to assumptions associated with policy run-off.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased
Year Ended
Net Loss Segment net loss increased$35,091 to$(59,502) for Twelve Months 2010 compared to a net loss of$(24,411) for Twelve Months 2009. This increase is mainly due to the non-recurrence of an$83,542 (after-tax) favorable legal settlement, net of attorney fees and allowances for related recoverables withWillis Limited in Twelve Months 2009. In addition, amortization of deferred gains on disposal of businesses declined$7,836 (after-tax) as a portion of the deferred gain liability was re-established during the fourth quarter of 2010 resulting from refinements to assumptions associated with policy run-off. Partially offsetting these items is a$66,300 (after-tax) increase in realized gains on investments. 68
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Table of Contents Total Revenues Total revenues decreased$49,033 , to$76,882 for Twelve Months 2010 compared with$125,915 for Twelve Months 2009. This decrease is primarily due to the above-mentioned favorable legal settlement of$139,000 withWillis Limited in Twelve Months 2009, partially offset by increased net realized gains on investments of$102,000 . In addition, amortization of deferred gains on disposal of businesses declined$12,055 for reasons noted above.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses remained relatively flat at
Goodwill Impairment During 2010 and 2009, the Company recorded goodwill impairments of$306,381 and$83,000 , respectively. No goodwill impairment was recorded during 2011. The goodwill accounting guidance in effect during 2010 and 2009 required that goodwill be tested for impairment using a two step process. Step 1 of the test identifies potential impairments at the reporting unit level, which for the Company is the same as our operating segments, by comparing the estimated fair value of each reporting unit to its net book value. If the estimated fair value of a reporting unit exceeds its net book value, there is no impairment of goodwill and Step 2 is unnecessary. However, if the net book value exceeds the estimated fair value, then Step 1 is failed, and Step 2 is performed to determine the amount of the potential impairment. Step 2 utilizes acquisition accounting guidance and requires the fair value calculation of all individual assets and liabilities of the reporting unit (excluding goodwill, but including any unrecognized intangible assets). The net fair value of assets less liabilities is then compared to the reporting unit's total estimated fair value as calculated in Step 1. The excess of fair value over the net asset value equals the implied fair value of goodwill. The implied fair value of goodwill is then compared to the carrying value of goodwill to determine the reporting unit's goodwill impairment. During 2011, the Company adopted the amended guidance on intangibles-goodwill and other. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, described above. For the Assurant Specialty Property reporting unit, the Company chose the option to first perform the qualitative assessment. For the Assurant Solutions reporting unit, the Company performed a Step 1 test consistent with prior years. See "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Factors Affecting Results-Critical Accounting Estimates-Valuation and Recoverability of Goodwill" and Notes 2 and 11 to the Consolidated Financial Statements contained elsewhere in this report for more information. Investments The Company had total investments of$14,026,165 and$13,519,848 as ofDecember 31, 2011 andDecember 31, 2010 , respectively. For more information on our investments see Note 4 to the Notes to Consolidated Financial Statements included elsewhere in this report. 69
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The following table shows the credit quality of our fixed maturity securities portfolio as of the dates indicated:
As of
December 31, 2010 Aaa / Aa / A $ 6,620,808 59.1 % $ 6,488,208 61.2 % Baa 3,692,709 33.0 % 3,227,216 30.4 % Ba 648,817 5.8 % 618,465 5.8 % B and lower 230,265 2.1 % 278,663 2.6 % Total $ 11,192,599 100.0 % $ 10,612,552 100.0 %
Major categories of net investment income were as follows:
Years Ended December 31, 2011 2010 2009
Fixed maturity securities $ 565,486 $ 572,909
Equity securities 29,645 33,864
38,189
Commercial mortgage loans on real estate 80,903 88,894
92,116 Policy loans 3,102 3,248 3,329 Short-term investments 5,351 5,259 7,933 Other investments 21,326 19,019 17,453
Cash and cash equivalents 7,838 5,577
8,359 Total investment income 713,651 728,770 726,018 Investment expenses (24,119 ) (25,580 ) (27,180 ) Net investment income $ 689,532 $ 703,190 $ 698,838
Net investment income decreased
Net investment income increased
The net unrealized gain position increased to
As ofDecember 31, 2011 , the Company owned$221,742 of securities guaranteed by financial guarantee insurance companies. Included in this amount was$198,734 of municipal securities, with a credit rating of A+ both with and without the guarantee. Our states, municipalities and political subdivisions holdings are highly diversified acrossthe United States andPuerto Rico , with no individual state's exposure (including both general obligation and revenue securities) exceeding 0.5% of the overall investment portfolio as ofDecember 31, 2011 andDecember 31, 2010 . AtDecember 31, 2011 andDecember 31, 2010 , the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including$164,347 and$154,742 , respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as "pre-refunded bonds"), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As ofDecember 31, 2011 andDecember 31, 2010 , revenue bonds account for 51% and 48% of the holdings, respectively. Excluding pre-refunded bonds, sales tax, highway, transit, water and miscellaneous (which includes bond banks, finance authorities and appropriations) provide for 79% and 80% of the revenue sources, as ofDecember 31, 2011 andDecember 31, 2010 , respectively. 70
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The Company's investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, which allow the assets and liabilities to be more appropriately matched. AtDecember 31, 2011 , approximately 63%, 13%, and 7% of the foreign government securities were held in the Canadian government/provincials and the governments ofBrazil andGermany , respectively. AtDecember 31, 2010 , approximately 60%, 11%, 7%, and 6% of the foreign government securities were held in the Canadian government/provincials, and the governments ofBrazil ,and the United Kingdom , respectively. No other country represented more than 5% of our foreign government securities as ofDecember 31, 2011 andDecember 31, 2010 . The Company has European investment exposure in its corporate fixed maturity and equity securities of$868,012 with an unrealized gain of$61,387 atDecember 31, 2011 and$891,095 with an unrealized gain of$52,282 atDecember 31, 2010 . Approximately 31% and 39% of the corporate European exposure are held in the financial industry atDecember 31, 2011 andDecember 31, 2010 , respectively. No European country represented more than 5% of the fair value of our corporate securities as ofDecember 31, 2011 andDecember 31, 2010 . Approximately 5% of the fair value of the corporate European securities are pound and euro-denominated and are not hedged to U.S. dollars, but, held to support those foreign-denominated liabilities. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification. The Company has exposure to sub-prime and related mortgages within our fixed maturity securities portfolio. AtDecember 31, 2011 , approximately 2.4% of our residential mortgage-backed holdings had exposure to sub-prime mortgage collateral. This represented approximately 0.2% of the total fixed income portfolio and 0.7% of the total unrealized gain position. Of the securities with sub-prime exposure, approximately 19.2% are rated as investment grade. All residential mortgage-backed securities, including those with sub-prime exposure, are reviewed as part of the ongoing other-than-temporary impairment monitoring process. As required by the fair value measurements and disclosures guidance, the Company has identified and disclosed its financial assets in a fair value hierarchy, which consists of the following three levels:
• Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access. • Level 2 inputs utilize other than quoted prices included in Level 1 that
are observable for the asset, either directly or indirectly, for
substantially the full term of the asset. Level 2 inputs include quoted
prices for similar assets in active markets, quoted prices for identical or
similar assets in markets that are not active and inputs other than quoted
prices that are observable in the marketplace for the asset. The observable
inputs are used in valuation models to calculate the fair value for the asset.
• Level 3 inputs are unobservable but are significant to the fair value
measurement for the asset, and include situations where there is little, if
any, market activity for the asset. These inputs reflect management's own
assumptions about the assumptions a market participant would use in pricing
the asset.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
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 which include observable market inputs. Observable market inputs are the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. 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. 71
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The following observable market inputs ("standard inputs"), listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. To price municipal bonds, the pricing service uses material event notices and new issue data inputs in addition to the standard inputs. To price residential and commercial mortgage-backed securities and asset-backed securities, the pricing service uses vendor trading platform data, monthly payment information and collateral performance inputs in addition to the standard inputs. To price fixed maturity securities denominated in Canadian dollars, the pricing service uses observable inputs, including but not limited to, benchmark yields, reported trades, issuer spreads, benchmark securities 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 to the pricing service, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources. If the Company cannot corroborate the non-binding broker quotes with Level 2 inputs, these securities are categorized as Level 3. A non-pricing service source prices certain privately placed corporate bonds using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons. A non-pricing service source prices our CPI Caps using a model with inputs including, but not limited to, the time to expiration, the notional amount, the strike price, the forward rate, implied volatility and the discount rate.
Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:
• There are few recent transactions, • Little information is released publicly, • The available prices vary significantly over time or among market participants, • The prices are stale (i.e., not current), and • The magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of the Company's financial assets.
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. Collateralized Transactions
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
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received in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality that are designated as available-for-sale. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained, as necessary. The Company is subject to the risk of loss to the extent there is a loss on the re-investment of cash collateral. As ofDecember 31, 2011 and 2010, our collateral held under securities lending, of which its use is unrestricted, was$95,221 and$122,219 , respectively, and is included in the consolidated balance sheets under the collateral held/pledged under securities agreements. Our liability to the borrower for collateral received was$95,494 and$122,931 , respectively, and is included in the consolidated balance sheets under the obligation under securities agreements. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of AOCI. All securities with unrealized losses have been in a continuous loss position for twelve months or longer as ofDecember 31, 2011 andDecember 31, 2010 . The Company has actively reduced the size of its securities lending to mitigate counterparty 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.
The Company has engaged in transactions in which securities issued by the U.S. government and government agencies and authorities, are purchased under agreements to resell ("reverse repurchase agreements"). However as of December 31, 2011 , the Company has no open transactions. The Company may take possession of the securities purchased under reverse repurchase agreements. Collateral, greater than or equal to 100% of the fair value of the securities purchased, plus accrued interest, is pledged to selected broker/dealers in the form of cash and cash equivalents or other securities, as provided for in the underlying agreement. The use of the cash collateral pledged is unrestricted. Interest earned on the collateral pledged is recorded as investment income. As of December 31, 2010 , we had $14,370 of receivables under securities loan agreements which are included on the consolidated balance sheets under the collateral held/pledged under securities agreements. The Company entered into these reverse repurchase agreements in order to initiate short positions in its investment portfolio. The borrowed securities are sold in the marketplace. The Company records obligations to return the securities that we no longer hold as a liability. The financial liabilities resulting from these borrowings are carried at fair value with the changes in value reported as realized gains or losses. As of December 31, 2010 , we had $14,281 of obligations to return borrowed securities which is included in the consolidated balance sheets under the obligation under securities agreements. Cash payments for the collateral pledged, subsequent cash adjustments to receivables under securities loan agreements and obligations to return borrowed securities, and the return of the cash collateral from the secured parties is regarded by the Company as cash flows from financing activities, since the cash payments and receipts relate to borrowing of securities under a financing arrangement.
Liquidity and Capital Resources
Regulatory RequirementsAssurant, Inc. is a holding company, and as such, has limited direct operations of its own. Our holding company assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries, such as payments under our tax allocation agreement and under management agreements with our subsidiaries. The ability to pay such dividends and to make such other payments will be limited by applicable laws and regulations 73
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of the states in which our subsidiaries are domiciled, which subject our subsidiaries to significant regulatory restrictions. The dividend requirements and regulations vary from state to state and by type of insurance provided by the applicable subsidiary. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. For further information on pending amendments to state insurance holding company laws, including the NAIC's "Solvency Modernization Initiative," see "Item 1A-Risk Factors-Risks Related to Our Company-Changes in regulation may reduce our profitability and limit our growth." Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from A. M. Best. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect our capital resources. OnOctober 27, 2011 , Standard and Poor's ("S&P") revised the outlook onAssurant, Inc's counterparty credit rating and the financial strength ratings ofAssurant's primary property and casualty ratings to positive from stable. In addition, S&P downgraded the financial strength ratings ofAssurant's primary health subsidiaries from BBB+ to BBB and revised the outlook on these entities to stable from negative. OnMarch 1, 2011 ,Moody's Investor Services ("Moody's") affirmedAssurant, Inc.'s Senior Debt rating of Baa2 but changed the outlook on this rating to negative from stable. In addition, Moody's affirmed the financial strength ratings ofAssurant's primary life and health insurance subsidiaries at A3 but changed the outlook on such ratings to negative from stable. For further information on our ratings and the risks of ratings downgrades, see "Item 1-Business" and "Item 1A-Risk Factors-Risks Related to Our Company-A.M. Best, Moody's and S&P rate the financial strength of our insurance company subsidiaries, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease". For 2012, the maximum amount of distributions our U.S. insurance subsidiaries could pay, under applicable laws and regulations without prior regulatory approval, is approximately$504,000 . In total, we took dividends or returns of capital, net of infusions, of$523,881 from our subsidiaries during 2011. We anticipate that we will be able to take dividends in 2012 of at least equal to insurance subsidiary earnings. Liquidity As ofDecember 31, 2011 , we had$764,436 in holding company capital. The Company uses the term "holding company capital" to represent cash and other liquid marketable securities held atAssurant, Inc. , out of a total of$914,949 , that we are not otherwise holding for a specific purpose as of the balance sheet date, but can be used for stock repurchases, stockholder dividends, acquisitions, and other corporate purposes.$250,000 of the$764,436 of holding company capital is intended to serve as a buffer against remote risks (such as large-scale hurricanes). Dividends or returns of capital, net of infusions, made to the holding Company from its operating companies were$523,881 ,$832,300 and 690,099 for the years endedDecember 31, 2011 , 2010 and 2009, respectively. We use these cash inflows primarily to pay expenses, to make interest payments on indebtedness, to make dividend payments to our stockholders, to make subsidiary capital contributions, to fund acquisitions and to repurchase our outstanding shares. In addition to paying expenses and making interest payments on indebtedness, our capital management strategy provides for several uses of the cash generated by our subsidiaries, including without limitation, returning capital to shareholders through share repurchases and dividends, investing in our businesses to support growth in targeted areas, and making prudent and opportunistic acquisitions. During 2011, 2010 and 2009 we made share repurchases and paid dividends to our stockholders of$600,314 ,$602,568 and$101,545 , respectively. During Second Quarter 2011 we acquired SureDeposit for$45,080 . See Note 3 to the Notes to Consolidated Financial Statements for more information on the SureDeposit acquisition. The primary sources of funds for our subsidiaries consist of premiums and fees collected, the proceeds from the sales and maturity of investments and investment income. Cash is primarily used to pay insurance claims, agent commissions, operating expenses and taxes. We generally invest our subsidiaries' excess funds in order to generate investment income. 74
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We conduct periodic asset liability studies to measure the duration of our insurance liabilities, to develop optimal asset portfolio maturity structures for our significant lines of business and ultimately to assess that cash flows are sufficient to meet the timing of cash needs. These studies are conducted in accordance with formal company-wide Asset Liability Management ("ALM") guidelines. To complete a study for a particular line of business, models are developed to project asset and liability cash flows and balance sheet items under a large, varied set of plausible economic scenarios. These models consider many factors including the current investment portfolio, the required capital for the related assets and liabilities, our tax position and projected cash flows from both existing and projected new business. Alternative asset portfolio structures are analyzed for significant lines of business. An investment portfolio maturity structure is then selected from these profiles given our return hurdle and risk preference. Sensitivity testing of significant liability assumptions and new business projections is also performed. Our liabilities have limited policyholder optionality which results in policyholder behavior that is relatively insensitive to the interest rate environment. In addition, our investment portfolio is largely comprised of highly liquid fixed maturity securities with a sufficient component of such securities invested that are near maturity which may be sold with minimal risk of loss to meet cash needs. Therefore, we believe we have limited exposure to disintermediation risk. Generally, our subsidiaries' premiums, fees and investment income, along with planned asset sales and maturities, provide sufficient cash to pay claims and expenses. However, there are instances when unexpected cash needs arise in excess of that available from usual operating sources. In such instances, we have several options to raise needed funds, including selling assets from the subsidiaries' investment portfolios, using holding company cash (if available), issuing commercial paper, or drawing funds from our revolving credit facility. In addition, we have filed an automatically effective shelf registration statement on Form S-3 with the SEC . This registration statement allows us to issue equity, debt or other types of securities through one or more methods of distribution. The terms of any offering would be established at the time of the offering, subject to market conditions. If we decide to make an offering of securities, we will consider the nature of the cash requirement as well as the cost of capital in determining what type of securities we may offer. On January 13, 2012 , our Board of Directors declared a quarterly dividend of $0.18 per common share payable on March 12, 2012 to stockholders of record as of February 27, 2012 . We paid dividends of $0.18 per common share on December 12, 2011 to stockholders of record as of November 28, 2011 , $0.18 per common share on September 13, 2011 to stockholders of record as of August 29, 2011 , $0.18 per common share on June 7, 2011 to stockholders of record as of May 23, 2011 , and $0.16 per common share on March 14, 2011 to stockholders of record as of February 28, 2011 . Any determination to pay future dividends will be at the discretion of our Board of Directors and will be dependent upon: our subsidiaries' payments of dividends and/or other statutorily permissible payments to us; our results of operations and cash flows; our financial position and capital requirements; general business conditions; legal, tax, regulatory and contractual restrictions on the payment of dividends; and other factors our Board of Directors deems relevant. On January 18, 2011 , the Company's Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock, making its total authorization $805,587 at that date. During the year ended December 31, 2011 , the Company repurchased 14,088,540 shares of its outstanding common stock at a cost of $532,648 , exclusive of commissions. As of December 31, 2011 , $305,392 remained under the total repurchase authorization. The timing and the amount of future repurchases will depend on market conditions and other factors. Management believes that we will have sufficient liquidity to satisfy our needs over the next twelve months, including the ability to pay interest on our senior notes and dividends on our common shares. 75
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Retirement and Other Employee Benefits
We sponsor a qualified pension plan, the ("Assurant Pension Plan") and various non-qualified pension plans along with a retirement health benefits plan covering our employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include, but are not limited to, the discount rate, expected return on plan assets and rate of future compensation increases. We determine these assumptions based upon currently available market and industry data, and historical performance of the plan and its assets. The actuarial assumptions used in the calculation of our aggregate projected benefit obligation vary and include an expectation of long-term appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. The assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. The Pension Protection Act of 2006 ("PPA") requires certain qualified plans, like the Assurant Pension Plan, to meet specified funding thresholds. If these funding thresholds are not met, there are negative consequences to the Assurant Pension Plan and participants. If the funded percentage falls below 80%, full payment of lump sum benefits as well as implementation of amendments improving benefits are restricted. As of January 1, 2011 , the Assurant Pension Plan's funded percentage was 106% on a PPA calculated basis. Therefore, benefit and payment restrictions did not occur during 2011. The 2011 funded measure will also be used to determine restrictions, if any, that can occur during the first nine months of 2012. Due to the funding status of the Assurant Pension Plan in 2011, no restrictions will exist before October 2012 (the time that the January 1, 2012 actuarial valuation needs to be completed). Also, based on the estimated funded status as of January 1, 2012 , we do not anticipate any restrictions on benefits for the remainder of 2012. The Assurant Pension Plan was under-funded by $125,517 and $96,278 (based on the fair value of the assets compared to the projected benefit obligation) on a GAAP basis at December 31, 2011 and 2010, respectively. This equates to an 83% and 85% funded status at December 31, 2011 and 2010, respectively. The change in under-funded status is mainly due to a decrease in the discount rate used to determine the projected benefit obligation, which is partially offset by better than expected asset performance. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements in ERISA, plus such additional amounts as the Company may determine to be appropriate from time to time up to the maximum permitted. The funding policy considers several factors to determine such additional amounts including items such as the amount of service cost plus 15% of the Assurant Pension Plan deficit and the capital position of the Company. During 2011, we contributed $40,000 in cash to the Assurant Pension Plan. We expect to contribute $50,000 in cash to the Assurant Pension Plan over the course of 2012. See Note 21 to the Consolidated Financial Statements included elsewhere in this report for the components of the net periodic benefit cost. The impact of a 25 basis point change in the discount rate on the 2012 projected benefit expense would result in a change of $2,900 for the Assurant Pension Plan and the various non-qualified pension plans and $50 for the retirement health benefit plan. The impact of a 25 basis point change in the expected return on assets assumption on the 2012 projected benefit expense would result in a change of $1,500 for the Assurant Pension Plan and the various non-qualified pension plans and $100 for the retirement health benefits plan. Commercial Paper Program The Company's commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the program or in an amount sufficient to maintain the ratings assigned to the notes issued from the program. Our commercial paper is rated AMB-2 by A.M. Best , P-2 by Moody's and A2 by S&P. The Company's subsidiaries do not maintain separate commercial paper or other borrowing facilities. This program is currently backed up by a $350,000 senior revolving credit facility, of which $325,704 was available at December 31, 2011 , due to outstanding letters of credit. 76
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OnSeptember 21, 2011 , we entered into a four-year unsecured$350,000 revolving credit agreement ("2011 Credit Facility") with a syndicate of banks arranged byJP Morgan Chase Bank, N.A. andBank of America, N.A. The 2011 Credit Facility replaces the Company's prior three-year$350,000 revolving credit facility ("2009 Credit Facility"), which was entered into onDecember 18, 2009 and was scheduled to expire inDecember 2012 . The 2009 Credit Facility terminated upon the effective date of the 2011 Credit Facility. Due to the termination, the Company wrote off$1,407 of unamortized upfront arrangement fees. The 2011 Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and/or letters of credit from a sole issuing bank in an aggregate amount of$350,000 and is available untilSeptember 2015 , provided we are in compliance with all covenants. The 2011 Credit Facility has a sublimit for letters of credit issued thereunder of$50,000 . The proceeds of these loans may be used for our commercial paper program or for general corporate purposes. The Company may increase the total amount available under the 2011 Credit Facility to$525,000 subject to certain conditions. No bank is obligated to provide commitments above their current share of the$350,000 facility. The Company did not use the commercial paper program during the twelve months endedDecember 31, 2011 and 2010 and there were no amounts relating to the commercial paper program outstanding atDecember 31, 2011 andDecember 31, 2010 . The Company made no borrowings using either the 2009 or 2011 Credit Facility and no loans were outstanding atDecember 31, 2011 . We had$24,296 of letters of credit outstanding under the 2011 Credit Facility as ofDecember 31, 2011 .
The 2011 Credit Facility contains restrictive covenants, all of which were met as of
(i) Maintenance of a maximum debt to total capitalization ratio on the last
day of any fiscal quarter of not greater than 35%, and
(ii) Maintenance of a consolidated adjusted net worth in an amount not less
than the "Minimum Amount". For the purpose of this calculation the
"Minimum Amount" is an amount equal to the sum of (a) the base amount
quarter (if positive) ending after
proceeds of any issuance of Capital Stock or
afterJune 30, 2011 .
At
In the event of the breach of certain covenants all obligations under the facility, including unpaid principal and accrued interest and outstanding letters of credit, may become immediately due and payable.
Senior Notes We have two series of senior notes outstanding in an aggregate principal amount of$975,000 . The first series is$500,000 in principal amount, bears interest at 5.63% per year and is dueFebruary 15, 2014 . The second series is$475,000 in principal amount, bears interest at 6.75% per year and is dueFebruary 15, 2034 . Interest on our senior notes is payable semi-annually onFebruary 15 andAugust 15 of each year. The interest expense incurred related to the Senior Notes was$60,188 for the years endedDecember 31, 2011 , 2010 and 2009, respectively. There was$22,570 of accrued interest atDecember 31, 2011 and 2010, respectively. The senior notes are unsecured obligations and rank equally with all of our other senior unsecured indebtedness. The senior notes are not redeemable prior to maturity.
In management's opinion, dividends from our subsidiaries together with our income and gains from our investment portfolio will provide sufficient liquidity to meet our needs in the ordinary course of business.
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We monitor cash flows at the consolidated, holding company and subsidiary levels. Cash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis, and we use trend and variance analyses to project future cash needs making adjustments to the forecasts when needed.
The table below shows our recent net cash flows:
For the Years Ended December 31, 2011 2010 2009 Net cash provided by (used in): Operating activities (1) $ 849,633 $ 540,313 $ 278,963 Investing activities (196,588 ) (8,876 ) 141,467 Financing activities (636,848 ) (699,473 ) (142,562 ) Net change in cash $ 16,197 $ (168,036 ) $ 277,868
(1) Includes effect of exchange rate changes on cash and cash equivalents.
Cash Flows for the Years Ended
Operating Activities: We typically generate operating cash inflows from premiums collected from our insurance products and income received from our investments while outflows consist of policy acquisition costs, benefits paid, and operating expenses. These net cash flows are then invested to support the obligations of our insurance products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees, and investment income received and expenses paid. Net cash provided by operating activities was$849,633 and$540,313 for the years endedDecember 31, 2011 and 2010, respectively. The increased operating activity cash flow is primarily due to an increase in net written premiums in our Assurant Solutions and Assurant Specialty Property segments. Net cash provided by operating activities was$540,313 and$278,963 for the years endedDecember 31, 2010 and 2009, respectively. The increased operating activity cash flow was primarily due to an increase in net written premiums in our Assurant Solutions and Assurant Specialty Property segments. Investing Activities: Net cash used in investing activities was$196,588 and$8,876 for the years endedDecember 31, 2011 and 2010, respectively. The increase in cash used in investing activities is primarily due to the acquisition of SureDeposit during the second quarter of 2011 and changes in our short-term investments and commercial mortgage loans on real estate.
Net cash (used in) provided by investing activities was
Financing Activities: Net cash used in financing activities was$636,848 and$699,473 for the years endedDecember 31, 2011 and 2010, respectively. The decrease in cash used in financing activities is primarily due to changes in the tax benefit from share-based payment arrangements and the change in obligation under securities lending. 78
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Net cash used in financing activities was$699,473 and$142,562 for the years endedDecember 31, 2010 and 2009, respectively. The increase in cash used in financing activities was primarily due to increased repurchases of our common stock and changes in our obligation under securities lending. The table below shows our cash outflows for interest and dividends for the periods indicated: For the Years Ended December 31, 2011 2010 2009 Interest paid on mandatory redeemable preferred stock and debt $ 60,244 $ 60,539 $ 60,569 Common stock dividends 67,385 69,618 69,596 Total $ 127,629 $ 130,157 $ 130,165 Commitments and Contingencies
We have obligations and commitments to third parties as a result of our operations. These obligations and commitments, as of
As of December 31, 2011 Less than 1 1-3 3-5 More than 5 Total Year Years Years Years Contractual obligations : Insurance liabilities (1) $ 19,422,821 $ 1,796,256 $ 1,640,797 $ 1,496,135 $ 14,489,633 Debt and related interest 1,736,626 60,188 592,250 64,125 1,020,063 Operating leases 123,077 27,708 41,474 28,651 25,244 Pension obligations and postretirement benefit 584,016 39,309 88,415 120,412 335,880 Commitments: Purchase commitments 100,000 100,000 - - - Investment purchases outstanding: - - - - - Commercial mortgage loans on real estate 15,760 15,760 - - - Other investments 555 555 - - - Liability for unrecognized tax benefit 21,563 9,386 8,981 3,196 - Total obligations and commitments $ 22,004,418 $ 2,049,162 $ 2,371,917 $ 1,712,519 $ 15,870,820
(1) Insurance liabilities reflect estimated cash payments to be made to
policyholders. Liabilities for future policy benefits and expenses of$8,269,343 and claims and benefits payable of$3,437,119 have been included in the commitments and contingencies table. Significant uncertainties relating to these liabilities include mortality, morbidity, expenses, persistency, investment returns, inflation, contract terms and the timing of payments. Letters of Credit
In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. We had
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company.
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