Assurant 2014 Annual Report Download - page 70

56 ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company has exposure to sub-prime and related mortgages
within our fi xed maturity security portfolio. At December 31,
2014, approximately 3% of the residential mortgage-backed
holdings had exposure to sub-prime mortgage collateral. This
represented approximately 0.2% of the total fi xed income
portfolio and 1% of the total unrealized gain position. Of
the securities with sub-prime exposure, approximately 11%
are rated as investment grade. All residential mortgage-
backed securities, including those with sub-prime exposure,
are reviewed as part of the ongoing other-than-temporary
impairment monitoring process.
As required by the fair value measurements and disclosures
guidance, the Company has identifi ed and disclosed its
fi nancial assets in a fair value hierarchy, which consists of
the following three levels:
•
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company
can access.
•
Level 2 inputs utilize other than quoted prices included in
Level 1 that are observable for the asset, either directly
or indirectly, for substantially the full term of the asset.
Level 2 inputs include quoted prices for similar assets in
active markets, quoted prices for identical or similar assets
in markets that are not active and inputs other than quoted
prices that are observable in the marketplace for the
asset. The observable inputs are used in valuation models
to calculate the fair value for the asset.
•
Level 3 inputs are unobservable but are signifi cant to the fair
value measurement for the asset, and include situations where
there is little, if any, market activity for the asset. These inputs
refl ect management’s own assumptions about the assumptions
a market participant would use in pricing the asset.
A review of fair value hierarchy classifi cations is conducted
on a quarterly basis. Changes in the observability of valuation
inputs may result in a reclassifi cation of levels for certain
securities within the fair value hierarchy.
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.
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.
A non-pricing service source prices certain privately placed
corporate bonds using a model with observable inputs
including, but not limited to, the credit rating, credit spreads,
sector add-ons, and issuer specifi c add-ons. A non-pricing
service source prices our CPI Caps 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.
Collateralized Transactions
The Company engages in transactions in which fi xed maturity
securities, primarily bonds issued by the U.S. government and
government agencies and authorities, and U.S. corporations, are
loaned to selected broker/dealers. Collateral, greater than or
equal to 102% of the fair value of the securities lent, plus accrued
interest, is received in the form of cash and cash equivalents
held by a custodian bank for the benefi t of the Company.