Assurant 2010 Annual Report Download - page 39

33ASSURANT, INC.  2010 Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
In June 2009, ARIC and AGIL, wholly-owned subsidiaries of the Company,
entered into a settlement agreement with Willis Limited, a subsidiary of
Willis Group Holdings Limited (“Willis Limited”).  e settlement agreement
related to an action commenced in 2007 in the English Commercial Court
pertaining to the placement of personal accident reinsurance. Under the
settlement agreement, Willis Limited paid ARIC and AGIL a total of
$139,000, which was recorded in the Corporate and Other segment.
DAC
Deferred acquisition costs (“DAC”) represent expenses incurred in prior
periods primarily for the production of new business, that have been
deferred for fi nancial reporting purposes. Acquisition costs primarily consist
of commissions, policy issuance expenses, premium tax and certain direct
marketing expenses.
 e DAC asset is tested annually to ensure that future premiums or gross
profi ts are suffi cient 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, benefi ts and expenses. To the extent a defi ciency
exists, it is recognized immediately by a charge to the statement of operations
and a corresponding reduction in the DAC asset. If the defi ciency is greater
than unamortized DAC, a liability will be accrued for the excess defi ciency.
Long Duration Contracts
Acquisition costs for preneed life insurance policies issued prior to
January 1, 2009 and certain discontinued life insurance policies have
been deferred and amortized in proportion to anticipated premiums over
the premium-paying period.  ese acquisition costs consist primarily
of fi rst year commissions paid to agents and sales and policy issue costs.
For preneed investment-type annuities, preneed life insurance policies
with discretionary death benefi t growth issued after January 1, 2009,
universal life insurance policies and investment-type annuity contracts
that are no longer off ered, DAC is amortized in proportion to the present
value of estimated gross profi ts from investment, mortality, expense
margins and surrender charges over the estimated life of the policy or
contract.  e 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 fi rst year commissions
to brokers and one time policy transfer fees and costs of issuing new
certifi cates.  ese 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 benefi t
health policies issued in 2007 and later are deferred and amortized
over the estimated average terms of the underlying contracts.  ese
acquisition costs relate to commissions payable under schedules that
pay signifi cantly higher rates in the fi rst 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.
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 and
group dental consist primarily of compensation to sales representatives.
 ese acquisition costs are front-end loaded; thus, they are deferred
and amortized over the estimated terms of the underlying contracts.
Acquisition costs on the majority of individual medical contracts
issued from 2003 through 2006, all individual medical contracts issued
after 2006 and all small group medical contracts consist primarily of
commissions to agents and brokers and compensation to representatives.
 ese contracts are considered short duration because the terms of the
contract are not fi xed at issue and they are not guaranteed renewable.
As a result, these costs are not deferred, but rather are recorded in
the statement of operations in the period in which they are incurred.
Investments
We regularly monitor our investment portfolio to ensure investments
that may be other-than-temporarily impaired are identifi ed in a timely
fashion, properly valued, and charged against earnings in the proper
period.  e 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
fi nancial 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 suffi cient to allow for recovery for equity securities,
or and the intent to sell or whether it is more likely than not that the
Company will be required to sell for fi xed 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.  e impairment
of a fi xed 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 fi xed 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 fl ows. For these other-than-temporarily impaired fi xed
maturity securities, the net amount recognized in earnings is equal
to the diff erence 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 aff ect 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 5 to the Consolidated Financial Statements included
elsewhere in this report and “Item 1A—Risk Factors— e value of
our investments could decline, aff ecting our profi tability and fi nancial
strength” and “Investments” contained later in this item.