Assurant 2011 Annual Report Download - page 101

ASSURANT, INC.2011 Form10-K F-25
5 Fair Value Disclosures
models, binomial or lattice models that incorporate present value
techniques and the multi-period excess earnings method.
Cost approach valuation techniques are based upon the amount that
would be required to replace the service capacity of an asset at the period-
end date, or the current replacement cost.  at is, from the perspective
of a market participant (seller), the price that would be received for the
asset is determined based on the cost to a market participant (buyer) to
acquire or construct a substitute asset of comparable utility, adjusted
for obsolescence.
While not all three approaches are applicable to all  nancial assets or
liabilities, where appropriate, one or more valuation techniques may
be used. For all the classes of  nancial assets and liabilities included
in the above hierarchy, excluding the CPI Caps and certain privately
placed corporate bonds, the market valuation technique is generally
used. For certain privately placed corporate bonds and the CPI Caps,
the income valuation technique is generally used. For the years ended
December31, 2011 and 2010, the application of the valuation technique
applied to the Company’s classes of  nancial assets and liabilities has
been consistent.
•Level 1 Securities
 e Company’s investments and liabilities classi ed as Level 1 as of
December31, 2011 and 2010, consisted of mutual funds and money
market funds, foreign government  xed maturities and common stocks
that are publicly listed and/or actively traded in an established market.
•Level 2 Securities
 e Company’s Level 2 securities are valued using various observable
market inputs obtained from a pricing service.  e 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.  e fair value
measurements and disclosures guidance de 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.  e 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.  e
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,
o ers and reference data including market research data. Further details
for level 2 investment types follow:
United States Government and government agencies and authorities:
United States government and government agencies and authorities
securities are priced by our pricing vendor utilizing standard inputs.
Included in this category are U.S. Treasury securities which are priced
using vendor trading platform data in addition to the standard inputs.
State, municipalities and political subdivisions: State, municipalities
and political subdivisions securities are priced by our pricing service
utilizing material event notices and new issue data inputs in addition
to the standard inputs.
Foreign governments: Foreign government securities are primarily
 xed maturity securities denominated in Canadian dollars which are
priced by our pricing service utilizing standard inputs.  e pricing
service also evaluates each security based on relevant market information
including relevant credit information, perceived market movements
and sector news.
Commercial mortgage-backed, residential mortgage-backed and
asset-backed: Commercial mortgage-backed, residential mortgage-
backed and asset-backed securities are priced by our pricing vendor
utilizing monthly payment information and collateral performance
information in addition to standard inputs. Additionally, commercial
mortgage-backed securities and asset-backed securities utilize new
issue data while residential mortgage-backed securities utilize vendor
trading platform data.
Corporate: Corporate securities are priced by our pricing vendor
utilizing standard inputs. Non-investment grade securities within this
category are priced by our pricing vendor utilizing observations of
equity and credit default swap curves related to the issuer in addition
to standard inputs. Certain privately placed corporate bonds are priced
by a non-pricing service source using a model with observable inputs
including, but not limited to, the credit rating, credit spreads, sector
add-ons, and issuer speci c add-ons.
Non-redeemable preferred stocks: Non-redeemable preferred stocks are
priced by our pricing vendor utilizing observations of equity and credit
default swap curves related to the issuer in addition to standard inputs.
Short-term investments, collateral held/pledged under securities,
other investments, cash equivalents, and assets/liabilities held
in separate accounts: To price the  xed maturity securities in these
categories, the pricing service utilizes the standard inputs.
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 quali 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
 e Company’s investments classi ed as Level 3 as of December31,
2011 and 2010, consisted of  xed maturity securities and derivatives.
All of the Level 3  xed maturity securities are priced using non-binding
broker quotes which cannot be corroborated with Level 2 inputs. 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.
Other assets: 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.