Assurant 2014 Annual Report Download - page 116

ASSURANT, INC. – 2014 Form 10-KF-28
6 Fair Value Disclosures
Three different valuation techniques can be used in
determining fair value for fi nancial assets and liabilities:
the market, income or cost approaches. The three valuation
techniques described in the fair value measurements and
disclosures guidance are consistent with generally accepted
valuation methodologies. The market approach valuation
techniques use prices and other relevant information generated
by market transactions involving identical or comparable assets
or liabilities. When possible, quoted prices (unadjusted) in
active markets are used as of the period-end date (such as for
mutual funds and money market funds). Otherwise, valuation
techniques consistent with the market approach including
matrix pricing and comparables are used. Matrix pricing is
a mathematical technique employed principally to value
debt securities without relying exclusively on quoted prices
for those securities but rather by relying on the securities’
relationship to other benchmark quoted securities. Market
approach valuation techniques often use market multiples
derived from a set of comparables. Multiples might lie in
ranges with a different multiple for each comparable. The
selection of where within the range the appropriate multiple
falls requires judgment, considering both qualitative and
quantitative factors specifi c to the measurement.
Income approach valuation techniques convert future amounts,
such as cash fl ows or earnings, to a single present amount,
or a discounted amount. These techniques rely on current
market expectations of future amounts as of the period-end
date. Examples of income approach valuation techniques
include present value techniques, option-pricing models,
binomial or lattice models that incorporate present value
techniques and the multi-period excess earnings method.
Cost approach valuation techniques are based upon the amount
that would be required to replace the service capacity of an
asset at the period-end date, or the current replacement
cost. That is, from the perspective of a market participant
(seller), the price that would be received for the asset is
determined based on the cost to a market participant (buyer)
to acquire or construct a substitute asset of comparable
utility, adjusted for obsolescence.
While not all three approaches are applicable to all fi nancial
assets or liabilities, where appropriate, one or more valuation
techniques may be used. For all the classes of fi nancial assets
and liabilities included in the above hierarchy, excluding the
CPI Caps and certain privately placed corporate bonds, the
market valuation technique is generally used. For certain
privately placed corporate bonds, the CPI Caps, and certain
derivatives, the income valuation technique is generally
used. For the years ended December 31, 2014 and 2013,
the application of the valuation technique applied to the
Company’s classes of fi nancial assets and liabilities has been
consistent.
•Level 1 Securities
The Company’s investments and liabilities classifi ed as Level 1
as of December 31, 2014 and 2013, consisted of mutual
funds and money market funds, foreign government fi xed
maturities and common stocks that are publicly listed and/
or actively traded in an established market.
•Level 2 Securities
The Company’s Level 2 securities are valued using various
observable market inputs obtained from a pricing service. The
pricing service prepares estimates of fair value measurements
for our Level 2 securities using proprietary valuation models
based on techniques such as matrix pricing which include
observable market inputs. The fair value measurements and
disclosures guidance defi nes observable market inputs as the
assumptions market participants would use in pricing the asset
or liability developed on market data obtained from sources
independent of the Company. The extent of the use of each
observable market input for a security depends on the type
of security and the market conditions at the balance sheet
date. Depending on the security, the priority of the use of
observable market inputs may change as some observable
market inputs may not be relevant or additional inputs
may be necessary. The following observable market inputs
(“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 including market research
data. Further details for Level 2 investment types follow:
United States Government and government agencies and
authorities: U.S. government and government agencies
and authorities securities are priced by our pricing service
utilizing standard inputs. Included in this category are U.S.
Treasury securities which are priced using vendor trading
platform data in addition to the standard inputs.
State, municipalities and political subdivisions: State,
municipalities and political subdivisions securities are priced
by our pricing service utilizing material event notices and
new issue data inputs in addition to the standard inputs.
Foreign governments: Foreign government securities are
primarily fi xed maturity securities denominated in Canadian
dollars which are priced by our pricing service utilizing
standard inputs. The pricing service also evaluates each
security based on relevant market information including
relevant credit information, perceived market movements
and sector news.
Commercial mortgage-backed, residential mortgage-backed
and asset-backed: Commercial mortgage-backed, residential
mortgage-backed and asset-backed securities are priced by
our pricing service utilizing monthly payment information
and collateral performance information in addition to the
standard inputs. Additionally, commercial mortgage-backed
securities and asset-backed securities utilize new issue data
while residential mortgage-backed securities utilize vendor
trading platform data.
Corporate: Corporate securities are priced by our pricing
service utilizing standard inputs. Non-investment grade
securities within this category are priced by our pricing
service utilizing observations of equity and credit default
swap curves related to the issuer in addition to the standard
inputs. Certain privately placed corporate bonds are priced
by a non-pricing service source using a model with observable