Assurant 2011 Annual Report Download - page 43

ASSURANT, INC.2011 Form10-K 35
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
 us, any adjustment to prior years’ incurred claims is partially o set
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, di erent assumptions and variables could lead to
signi cantly di erent 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 a ecting loss frequency include the e ectiveness
of loss controls and safety programs and changes in economic activity
or weather patterns. Factors a ecting loss severity include changes in
policy limits, retentions, rate of in ation and judicial interpretations.
If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be di erent than management’s
estimate.  e e ect 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 severity for all Property and Warranty
Ultimatecostofclaims
occurring in 2011
Changeincostofclaims
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.  is 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) at December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 su ciently detailed data, reporting delays and absence of a
generally accepted actuarial methodology for those exposures.  ere
are signi cant 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  nal allocation of losses to
 nancially responsible parties are highly uncertain. However, based on
information currently available, and after consideration of the reserves
re ected in the consolidated  nancial 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
the London market and, as a result, reinsured certain personal accident,
ransom and kidnap insurance risks from 1995 to 1997. ARIC and
a foreign a liate 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.
Many of the companies involved in these programs, including ARIC,
are currently involved in negotiations, arbitrations and/or litigation in
an e ort to resolve these disputes.  e disputes involving ARIC and
an a liate, Assurant General Insurance Limited (formerly Bankers
Insurance Company Limited (“AGIL”)), for the 1995 and 1996 program
years are subject to working group settlements negotiated with other
market participants. Negotiations, arbitrations and litigation are still
ongoing or will be scheduled for the remaining disputes.
In the last  ve years, several settlements have been made relating
to the 1995-1997 programs which have reduced ARIC’s liabilities
signi cantly. 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 of December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 di cult 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  nancial reporting purposes. Acquisition costs primarily
consist of commissions, policy issuance expenses, premium tax and
certain direct marketing expenses.