Assurant 2014 Annual Report Download - page 57

43ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation and Recoverability of Goodwill
Goodwill represented $841,239 and $784,561 of our
$31,562,466 and $29,714,689 of total assets as of December 31,
2014 and 2013, respectively. We review our goodwill annually
in the fourth quarter for impairment, or more frequently if
indicators of impairment exist. Such indicators include, but
are not limited to, signifi cant adverse change in legal factors,
adverse action or assessment by a regulator, unanticipated
competition, loss of key personnel or a signifi cant decline in
our expected future cash fl ows due to changes in company-
specifi c factors or the broader business climate. The evaluation
of such factors requires considerable judgment. Any adverse
change in these factors could have a signifi cant impact on
the recoverability of goodwill and could have a material
impact on our consolidated fi nancial statements.
We have concluded that our reporting units for goodwill
testing are equivalent to our operating segments. Therefore,
we test goodwill for impairment at the reporting unit level.
The following table illustrates the amount of goodwill carried at each reporting unit:
December 31,
2014 2013
Assurant Solutions $ 539,653 $ 496,201
Assurant Specialty Property 301,586 288,360
Assurant Health — —
Assurant Employee Benefi ts — —
TOTAL $ 841,239 $ 784,561
For the 2014 impairment test, we compared each reporting
unit’s estimated fair value with its net book value (“Step 1”).
For both the Assurant Solutions and Assurant Specialty Property
reporting units, goodwill was deemed not to be impaired
because their estimated fair values exceeded their net book
values. No further testing was necessary.
The following describes the valuation methodologies used
in the Step 1 test to derive the estimated fair value of the
reporting units.
For each reporting unit, we identifi ed a group of peer companies,
which have operations that are as similar as possible to the
reporting unit. Certain of our reporting units have a very limited
number of peer companies. A Guideline Company Method is used
to value the reporting unit based upon its relative performance
to its peer companies, based on several measures, including
price to trailing 12 month earnings, price to projected earnings,
price to tangible net worth and return on equity.
A Dividend Discount Method (“DDM”) is used to value each
reporting unit based upon the present value of expected
cash fl ows available for distribution over future periods. Cash
fl ows are estimated for a discrete projection period based
on detailed assumptions, and a terminal value is calculated
to refl ect the value attributable to cash fl ows beyond the
discrete period. Cash fl ows and the terminal value are then
discounted using the reporting unit’s estimated cost of capital.
The estimated fair value of the reporting unit equals the sum
of the discounted cash fl ows and terminal value.
A Guideline Transaction Method values the reporting unit
based on available data concerning the purchase prices paid in
acquisitions of companies operating in the insurance industry.
The application of certain fi nancial multiples calculated from
these transactions provides an indication of estimated fair
value of the reporting units.
While all three valuation methodologies were considered in
assessing fair value, the DDM was weighed more heavily since
in the current economic environment, management believes
that expected cash fl ows are the most important factor in
the valuation of a business enterprise. In addition, recent
dislocations in the economy, the scarcity of M&A transactions
in the insurance marketplace and the relative lack of directly
comparable companies, particularly for Assurant Solutions,
make the other methods less credible.
Following the 2014 Step 1 test, the Company concluded that
the estimated fair value of the Assurant Solutions reporting
unit exceeded its net book value by 25.4%, while the Assurant
Specialty Property reporting unit exceeded its net book value
by 33.3%.
Following the 2013 Step 1 test, the Company concluded that
the estimated fair value of the Assurant Solutions reporting
unit exceeded its net book value by 16.3%.
In 2013, the Company chose the option to perform a qualitative
assessment for our Assurant Specialty Property reporting unit.
This option allows us to fi rst assess qualitative factors to
determine whether the existence of events or circumstances
leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount.
In undertaking our qualitative assessment of the Assurant
Specialty Property reporting unit in 2013, we considered
macro-economic, industry and reporting unit-specifi c factors.
These included (i) the effect of the current interest rate
environment on our cost of capital; (ii) Assurant Specialty
Property’s sustaining market share over the year; (iii) lack of
turnover in key management; (iv) 2013 actual performance
as compared to expected 2013 performance from our 2012
Step 1 assessment; and, (v) the overall market position and
share price of Assurant, Inc. If, after assessing the totality of
events or circumstances, an entity determines it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount, then it is required to perform a Step 1test.
Based on our qualitative assessment, having considered the
factors in totality, we determined that it was not necessary
to perform a Step 1 test for Assurant Specialty Property and
that it was more-likely-than-not that the fair value of Assurant
Specialty Property continued to exceed its net book value
at year-end 2013.