Assurant 2010 Annual Report Download - page 42

36 ASSURANT, INC.  2010 Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 were discounted using a
market participant weighted average cost of capital estimated for a
reporting unit. After discounting the future discrete earnings to their
present value, the Company estimated the terminal value attributable
to the years beyond the discrete operating plan period.  e discounted
terminal value was then added to the aggregate discounted distributable
earnings from the discrete operating plan period to estimate the fair
value of the reporting unit.
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.  e 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 2010 goodwill assessment, the Company concluded that
the net book values of the Assurant Employee Benefi ts and Assurant
Health reporting units exceeded their estimated fair values. Based on the
results of the Step 2 test, the Company recorded impairment charges of
$102,078 and $204,303 related to the Assurant Employee Benefi ts and
Assurant Health reporting units, respectively, representing their entire
goodwill asset balances. During 2009, the Company concluded that the
net book value of the Assurant Employee Benefi ts reporting unit exceeded
its estimated fair value and recorded an $83,000 impairment charge after
performing a Step 2 test.  e 2010 impairments at Assurant Employee
Benefi ts and Assurant Health refl ect the eff ects of the Aff ordable Care
Act, the low interest rate environment, continuing high unemployment,
the slow pace of the economic recovery and increased net book value
primarily related to their investment portfolios.  e 2009 impairment
at Assurant Employee Benefi ts refl ected the challenging near term
growth environment for the business and an increased net book value,
primarily related to their investment portfolio. Management remains
confi dent in the long-term prospects of both the Assurant Employee
Benefi ts and Assurant Health reporting units. See Note 6 and 11 for
further information.
 e two reporting units that passed the 2010 Step 1 test, Assurant
Solutions and Assurant Specialty Property, had estimated fair values
that exceeded their net book values by 1.9% and 62.9%, respectively.
Assurant Solutions passed the 2010 Step 1 test, by a slim margin mainly
due to a signifi cant increase in its net book value.  e low interest rate
environment in 2010 resulted in a signifi cant increase in net unrealized
gains in Assurant Solutions’ fi xed income investments.
 e determination of fair value of our reporting units requires signifi cant
estimates and assumptions.  ese estimates and assumptions primarily
include, but are not limited to, earnings and required capital projections
discussed above, discount rates, terminal growth rates, operating income
and dividend forecasts for each reporting unit and the weighting
assigned to the results of each of the three valuation methods described
above. Changes in certain assumptions could have a signifi cant impact
on the goodwill impairment assessment. For example, an increase of
the discount rate of 100 basis points, with all other assumptions held
constant, for Assurant Solutions, would result in its estimated fair
value being less than its net book value as of December 31, 2010.
Likewise, a reduction of 100 basis points in the terminal growth rate,
with all other assumptions held constant, for Assurant Solutions would
result in its estimated fair value being less than its net book value as of
December 31, 2010. It would take more signifi cant movements in our
estimates and assumptions in order for Assurant Specialty Property’s
estimated fair value to be less than its net book value.
We evaluated the signifi cant assumptions used to determine the estimated
fair values of each reporting unit, both individually and in the aggregate,
and concluded they are reasonable. However, should weak market
conditions continue for an extended period or should the operating
results of any of our reporting units decline substantially compared
to projected results, or interest rates decline further increasing the net
unrealized gain position related to the reporting units investment portfolio
and thus the reporting units’ net book values, we could determine that
we need to record an impairment charge related to goodwill in our
Assurant Solutions or Assurant Specialty Property reporting units.
Recent Accounting Pronouncements—Adopted
On January 1, 2010, the Company adopted the new guidance on
transfers of fi nancial assets.  is new guidance amends the derecognition
guidance and eliminates the exemption from consolidation for qualifying
special-purpose entities.  e adoption of this new guidance did not have
an impact on the Company’s fi nancial position or results of operations.
On January 1, 2010, the Company adopted the new guidance on the
accounting for a variable interest entity (“VIE”).  is new guidance
amends the consolidation guidance applicable to VIEs to require a
qualitative assessment in the determination of the primary benefi ciary
of the VIE, to require an ongoing reconsideration of the primary
benefi ciary, to amend the events that trigger a reassessment of whether
an entity is a VIE and to change the consideration of kick-out rights in
determining if an entity is a VIE.  e adoption of this new guidance
did not have an impact on the Company’s fi nancial position or results
of operations.
On July 1, 2009, the Company adopted the new guidance that
establishes a single source of authoritative accounting and reporting
guidance recognized by the FASB for nongovernmental entities (the
“Codifi cation”).  e Codifi cation does not change current GAAP, but is
intended to simplify user access to all authoritative GAAP by providing
all the authoritative literature related to a particular topic in one place.
All existing accounting standard documents will be superseded and
all other accounting literature not included in the Codifi cation will
be considered non-authoritative.  e adoption of the new guidance
did not have an impact on the Company’s fi nancial position or results
of operations. References to accounting guidance contained in the
Company’s consolidated fi nancial statements and disclosures have been
updated to refl ect terminology consistent with the Codifi cation. Plain
English references to the accounting guidance have been made along
with references to the ASC topic number and name.
On December 31, 2009, the Company adopted the new guidance
on postretirement benefi t plan assets.  is new guidance requires