Assurant 2010 Annual Report Download - page 56

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50 ASSURANT, INC.2010 Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management evaluates the following factors in order to determine
whether the market for a fi nancial asset is inactive.  e factors include,
but are not limited to:
• ere are few recent transactions,
•Little information is released publicly,
•
e available prices vary signifi cantly over time or among market
participants,
• e prices are stale (i.e., not current), and
• e magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination
of the Company’s fi nancial assets.
e Company generally obtains one price for each fi nancial asset.  e
Company performs a monthly analysis to assess if the evaluated prices
represent a reasonable estimate of their fair value.  is 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 diff erent 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.
e pricing service provides information to indicate which securities
were priced using market observable inputs so that the Company can
properly categorize our fi nancial assets in the fair value hierarchy.
Securities Lending and Borrowing
e Company engages in transactions in which fi xed maturity securities,
especially bonds issued by the U.S. government, government agencies
and authorities, and U.S. corporations, are loaned to selected broker/
dealers. Collateral, greater than or equal to 102% of the fair value of
the securities lent, plus accrued interest, is received in the form of
cash and cash equivalents held by a custodian bank for the benefi t
of the Company.  e use of cash collateral received is unrestricted.
e Company reinvests the cash collateral received, generally in
investments of high credit quality that are designated as available-for-
sale.  e Company monitors the fair value of securities loaned and
the collateral received, with additional collateral obtained, as necessary.
e Company is subject to the risk of loss to the extent there is a loss
on the re-investment of cash collateral.
As of December 31, 2010 and 2009, our collateral held under
securities lending, of which its use is unrestricted, was $122,219 and
$218,129, respectively, while our liability to the borrower for collateral
received was $122,931 and $220,279, respectively.  e diff erence
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 of December 31, 2010 and
December 31, 2009.  e 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 fl ows from fi nancing 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 fl ows from investing activities.
e Company began engaging in transactions during 2010 in which
securities issued by the U.S. government and government agencies and
authorities, are purchased under agreements to resell (“reverse repurchase
agreements”).  e 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 in the form of cash and cash equivalents or
other securities, as provided for in the underlying agreement to selected
broker/dealers.  e 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 is included in other assets on
the consolidated balance sheets.
e Company enters into these reverse repurchase agreements in order
to initiate short positions in its investment portfolio.  e borrowed
securities are sold in the marketplace.  e Company records obligations
to return the securities that we no longer hold as a liability.  e
fi nancial 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 accounts payable and other
liabilities on the consolidated balance sheets.
Liquidity and Capital Resources
Regulatory Requirements
Assurant, 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
fl ows 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.  e ability to pay such dividends and to make such other
payments will be limited by applicable laws and regulations of the states
in which our subsidiaries are domiciled, which subject our subsidiaries
to signifi cant regulatory restrictions.  e dividend requirements and
regulations vary from state to state and by type of insurance provided
by the applicable subsidiary.  ese 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. 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 fi nancial
strength ratings from A. M. Best. Given recent economic events that
have aff ected the insurance industry, both regulators and rating agencies
could become more conservative in their methodology and criteria,