Assurant 2011 Annual Report Download - page 61

ASSURANT, INC.2011 Form10-K 53
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
the collateral received, with additional collateral obtained, as necessary.
 e Company is subject to the risk of loss to the extent there is a loss
on the re-investment of cash collateral.
As of December31,2011 and 2010, our collateral held under securities
lending, of which its use is unrestricted, was $95,221 and $122,219,
respectively, and is included in the consolidated balance sheets under
the collateral held/pledged under securities agreements. Our liability
to the borrower for collateral received was $95,494 and $122,931,
respectively, and is included in the consolidated balance sheets under
the obligation under securities agreements.  e di erence between the
collateral held and obligations under securities lending is recorded as
an unrealized loss and is included as part of AOCI. All securities with
unrealized losses have been in a continuous loss position for twelve
months or longer as of December31,2011 and December31,2010.
 e Company has actively reduced the size of its securities lending to
mitigate counterparty exposure.  e Company includes the available-
for-sale investments purchased with the cash collateral in its evaluation
of other-than-temporary impairments.
Cash proceeds that the Company receives as collateral for the securities
it lends and subsequent repayment of the cash are regarded by the
Company as cash  ows from  nancing activities, since the cash received is
considered a borrowing. Since the Company reinvests the cash collateral
generally in investments that are designated as available-for-sale, the
reinvestment is presented as cash  ows from investing activities.
 e Company has engaged in transactions in which securities issued
by the U.S. government and government agencies and authorities, are
purchased under agreements to resell (“reverse repurchase agreements”).
However as of December31,2011, the Company has no open
transactions.  e Company may take possession of the securities
purchased under reverse repurchase agreements. Collateral, greater
than or equal to 100% of the fair value of the securities purchased,
plus accrued interest, is pledged to selected broker/dealers in the
form of cash and cash equivalents or other securities, as provided for
in the underlying agreement.  e use of the cash collateral pledged
is unrestricted. Interest earned on the collateral pledged is recorded
as investment income. As of December31,2010, we had $14,370 of
receivables under securities loan agreements which are included on the
consolidated balance sheets under the collateral held/pledged under
securities agreements.
 e Company entered into these reverse repurchase agreements
in order to initiate short positions in its investment portfolio.  e
borrowed securities are sold in the marketplace.  e Company records
obligations to return the securities that we no longer hold as a liability.
 e  nancial liabilities resulting from these borrowings are carried at
fair value with the changes in value reported as realized gains or losses.
As of December31,2010, we had $14,281 of obligations to return
borrowed securities which is included in the consolidated balance sheets
under the obligation under securities agreements.
Cash payments for the collateral pledged, subsequent cash adjustments
to receivables under securities loan agreements and obligations to
return borrowed securities, and the return of the cash collateral from
the secured parties is regarded by the Company as cash  ows from
 nancing activities, since the cash payments and receipts relate to
borrowing of securities under a  nancing arrangement.
Liquidity and Capital Resources
Regulatory Requirements
Assurant,Inc. is a holding company, and as such, has limited direct
operations of its own. Our holding company assets consist primarily
of the capital stock of our subsidiaries. Accordingly, our future cash
 ows depend upon the availability of dividends and other statutorily
permissible payments from our subsidiaries, such as payments under our
tax allocation agreement and under management agreements with our
subsidiaries.  e ability to pay such dividends and to make such other
payments will be limited by applicable laws and regulations of the states
in which our subsidiaries are domiciled, which subject our subsidiaries
to signi cant regulatory restrictions.  e dividend requirements and
regulations vary from state to state and by type of insurance provided
by the applicable subsidiary.  ese laws and regulations require, among
other things, our insurance subsidiaries to maintain minimum solvency
requirements and limit the amount of dividends these subsidiaries
can pay to the holding company. For further information on pending
amendments to state insurance holding company laws, including the
NAIC’s “Solvency Modernization Initiative,” see “Item1A—Risk
Factors—Risks Related to Our Company—Changes in regulation may
reduce our pro tability and limit our growth.” Along with solvency
regulations, the primary driver in determining the amount of capital
used for dividends is the level of capital needed to maintain desired
 nancial strength ratings from A. M. Best. Given recent economic
events that have a ected the insurance industry, both regulators and
rating agencies could become more conservative in their methodology
and criteria, including increasing capital requirements for our insurance
subsidiaries which, in turn, could negatively a ect our capital resources.
On October27,2011, Standard and Poor’s (“S&P”) revised the
outlook on Assurant, Inc’s counterparty credit rating and the  nancial
strength ratings of Assurant’s primary property and casualty ratings
to positive from stable. In addition, S&P downgraded the  nancial
strength ratings of Assurant’s primary health subsidiaries from BBB+ to
BBB and revised the outlook on these entities to stable from negative.
On March1,2011, Moody’s Investor Services (“Moody’s”) a rmed
Assurant,Inc.’s Senior Debt rating of Baa2 but changed the outlook
on this rating to negative from stable. In addition, Moody’s a rmed
the  nancial strength ratings of Assurant’s primary life and health
insurance subsidiaries at A3 but changed the outlook on such ratings
to negative from stable. For further information on our ratings and the
risks of ratings downgrades, see “Item1—Business” and “Item1A—Risk
Factors—Risks Related to Our Company—A.M. Best, Moody’s and
S&P rate the  nancial strength of our insurance company subsidiaries,
and a decline in these ratings could a ect our standing in the insurance
industry and cause our sales and earnings to decrease”. For 2012, the
maximum amount of distributions our U.S. insurance subsidiaries could
pay, under applicable laws and regulations without prior regulatory
approval, is approximately $504,000. In total, we took dividends or
returns of capital, net of infusions, of $523,881 from our subsidiaries
during 2011. We anticipate that we will be able to take dividends in
2012 of at least equal to insurance subsidiary earnings.