Assurant 2014 Annual Report Download - page 54

40 ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be
different than management’s estimate. The effect of higher and lower levels of loss frequency and severity levels on our
ultimate costs for claims occurring in 2014 would be as follows:
Change in both loss frequency and severity for all Property and Warranty
Ultimate cost of
claims occurring in
2014
Change in cost of
claims occurring in
2014
3% higher $ 718,756 $ 41,260
2% higher $ 704,867 $ 27,371
1% higher $ 691,114 $ 13,618
Base scenario $ 677,496 $ —
1% lower $ 663,878 $ (13,618)
2% lower $ 650,125 $ (27,371)
3% lower $ 636,236 $ (41,260)
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. This 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 $30,036 (before reinsurance)
and $27,085 (net of reinsurance) at December 31, 2014.
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 suffi ciently detailed
data, reporting delays and absence of a generally accepted
actuarial methodology for those exposures. There are
signifi 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 fi nal allocation of losses to fi nancially responsible
parties are highly uncertain. However, based on information
currently available, and after consideration of the reserves
refl ected in the consolidated fi nancial statements, we do not
believe that changes in reserve estimates for these claims
are likely to be material.
Deferred Acquisition Costs
Only direct incremental costs associated with the successful
acquisition of new or renewal insurance contracts are deferred,
to the extent that such costs are deemed recoverable from
future premiums or gross profi ts. Acquisition costs primarily
consist of commissions and premium taxes. Certain direct
response advertising expenses are deferred when the primary
purpose of the advertising is to elicit sales to customers
who can be shown to have specifi cally responded to the
advertising and the direct response advertising results in
probable future benefi ts.
The deferred acquisition costs (“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 consolidated statements 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. These
acquisition costs consist primarily of fi rst year commissions
paid to agents.
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
offered, 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. Estimated gross profi ts include
the impact of unrealized gains or losses on investments as if
these gains or losses had been realized, with corresponding
credits or charges included in AOCI. The 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, costs of issuing new
certifi cates and compensation to sales representatives.
These 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. These acquisition costs relate to
commission expenses which result from commission schedules
that pay signifi cantly higher rates in the fi rst year.