Assurant 2014 Annual Report Download - page 117

ASSURANT, INC. – 2014 Form 10-K F-29
6 Fair Value Disclosures
inputs including, but not limited to, the credit rating, credit
spreads, sector add-ons, and issuer specifi c add-ons.
Non-redeemable preferred stocks: Non-redeemable preferred
stocks 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.
Short-term investments, collateral held/pledged under
securities agreements, other investments, cash equivalents,
and assets/liabilities held in separate accounts: To price
the fi xed maturity securities in these categories, the pricing
service utilizes the standard inputs.
Other liabilities: The contingent consideration liability related
to a business combination is valued at the contractual amount
stated in the purchase agreement plus accrued interest.
The contractual amount plus interest represents the fair
value and is a market observable input due to the fact the
amount is specifi cally stated in the agreement and there is
a short time frame (less than three months) for determining
whether the payment will be made or not.
Valuation models used by the pricing service 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 qualifi ed
sources. If the Company cannot corroborate the non-binding
broker quotes with Level 2 inputs, these securities are
categorized as Level 3 securities.
•Level 3 Securities
The Company’s investments classifi ed as Level 3 as of
December 31, 2014 and 2013, consisted of fi xed maturity
and equity securities and derivatives. All of the Level 3 fi xed
maturity and equity securities are priced using non-binding
broker quotes which cannot be corroborated with Level 2
inputs. Of our total Level 3 fi xed maturity and equity securities,
$63,614 and $70,244 were priced by a pricing service using
single broker quotes due to insuffi cient information to provide
an evaluated price as of December 31, 2014 and 2013,
respectively. The single broker quotes are provided by market
makers or broker-dealers who are recognized as market
participants in the markets in which they are providing the
quotes. The remaining $47,923 and $97,219 were priced
internally using independent and non-binding broker quotes
as of December 31, 2014 and 2013, respectively. The inputs
factoring into the broker quotes include trades in the actual
bond being priced, trades of comparable bonds, quality of the
issuer, optionality, structure and liquidity. Signifi cant changes
in interest rates, issuer credit, liquidity, and overall market
conditions would result in a signifi cantly lower or higher
broker quote. The prices received from both the pricing
service and internally are reviewed for reasonableness by
management and if necessary, management works with the
pricing service or broker to further understand how they
developed their price. Further details on Level 3 derivative
investment types follow:
Other investments and other liabilities: Swaptions are
priced using a Black-Scholes pricing model incorporating
third-party market data, including swap volatility data. Credit
default swaps are priced using non-binding quotes provided
by market makers or broker-dealers who are recognized as
market participants. Inputs factored into the non-binding
quotes include trades in the actual credit default swap which
is being priced, trades in comparable credit default swaps,
quality of the issuer, structure and liquidity. The net option
related to the investment in Iké is valued using an income
approach; specifi cally, a Monte Carlo simulation option pricing
model. The inputs to the model include, but are not limited
to, the projected normalized earnings before interest, tax,
depreciation, and amortization (EBITDA) and free cash fl ow
for the underlying asset, the discount rate, and the volatility
of and the correlation between the normalized EBITDA and
the value of the underlying asset. Signifi cant increases
(decreases) in the projected normalized EBITDA relative to
the value of the underlying asset in isolation would result
in a signifi cantly higher (lower) fair value.
Other assets: A non-pricing service source prices the CPI
Cap derivatives 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 fi nancial 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 signifi cantly 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 fi nancial assets.
The Company generally obtains one price for each fi nancial
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 fi nancial assets in the fair value hierarchy.