Assurant 2011 Annual Report Download - page 47

ASSURANT, INC.2011 Form10-K 39
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
A Dividend Discount Method (“DDM”) is used to value each reporting
unit based upon the present value of expected cash  ows available for
distribution over future periods. Cash  ows are estimated for a discrete
projection period based on detailed assumptions, and a terminal value is
calculated to re ect the value attributable to cash  ows beyond the discrete
period. Cash  ows and the terminal value are then discounted using the
reporting unit’s estimated cost of capital.  e estimated fair value of the
reporting unit equals the sum of the discounted cash  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.  e application of
certain  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  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 Step1 test, the Company concluded that the net
book values of the Assurant Employee Bene ts and Assurant Health
reporting units exceeded their estimated fair values. Based on the
results of the Step2 test which is used to determine the implied fair
value of goodwill in the same manner as if the reporting unit were
being acquired in a business combination, the Company recorded
impairment charges of $102,078 and $204,303 related to the Assurant
Employee Bene 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
Bene ts reporting unit exceeded its estimated fair value and recorded
an $83,000 impairment charge after performing a Step2 test. 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 signi cant increase in its net book value.  e low interest rate
environment in 2010 resulted in a signi cant increase in net unrealized
gains in Assurant Solutions’  xed income investments.
 e determination of fair value of our reporting units requires many
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 signi cant impact on the
goodwill impairment assessment. For example, an increase of the discount
rate of 150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,2011. Likewise, a reduction of
250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,2011.
We evaluated the signi cant assumptions used to determine the
estimated fair values of Assurant Solutions, both individually and in
the aggregate, and concluded they are reasonable. However, should the
operating results of the unit decline substantially compared to projected
results, or should further interest rate declines further increase the net
unrealized investment portfolio gain position, we could determine
that we need to record an impairment charge related to goodwill in
Assurant Solutions.
Recent Accounting Pronouncements—Adopted
On December31,2011, the Company adopted the new guidance related
to the presentation of comprehensive income.  is guidance provides
two alternatives for presenting comprehensive income. An entity can
report comprehensive income either in a single continuous  nancial
statement or in two separate but consecutive  nancial statements. Each
component of net income and each component of other comprehensive
income, together with totals for comprehensive income and its two
parts, net income and other comprehensive income, are displayed
under either alternative.  e statement(s) are to be presented with
equal prominence as the other primary  nancial statements.  e new
guidance eliminates the Company’s previously applied option to report
other comprehensive income and its components in the statement of
changes in stockholders’ equity.  e guidance does not change the
items that constitute net income or other comprehensive income,
and does not change when an item of other comprehensive income
must be reclassi ed to net income.  e Company chose to early adopt
this guidance and therefore is reporting comprehensive income in a
separate but consecutive statement, with full retrospective application
as required by the guidance.  e adoption of the new presentation
requirements did not have an impact on the Company’s  nancial
position or results of operations.
On October1,2011, the Company adopted the amended intangibles-
goodwill and other guidance.  is guidance allows an entity to  rst assess
qualitative factors to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. Under this amended
guidance, an entity would not be required to calculate the fair value
of a reporting unit unless the entity determines, based on a qualitative
assessment, that it is more likely than not that its fair value is less than
its carrying amount.  e amended guidance includes a number of events
and circumstances for an entity to consider in conducting the qualitative
assessment.  e Company chose to early adopt the revised standard and
applied the amended guidance to its fourth quarter annual goodwill
impairment test.  e adoption of the amended guidance results in a
change to the procedures for assessing goodwill impairment and did
not have an impact on the Company’s  nancial position or results of
operations. See Notes 2 and 10 for more information.
On January1,2011, the Company adopted the new guidance on
multiple deliverable revenue arrangements.  is guidance requires
entities to use their best estimate of the selling price of a deliverable
within a multiple deliverable revenue arrangement if the entity and other
entities do not sell the deliverable separate from the other deliverables
within the arrangement. In addition, it requires both qualitative and
quantitative disclosures.  e adoption of this guidance did not have
an impact on the Company’s  nancial position or results of operations.
On January1,2010, the Company adopted the guidance on transfers
of  nancial assets.  is guidance amended the derecognition guidance