Assurant 2012 Annual Report Download - page 47

ASSURANT, INC.2012 Form10-K 39
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation and Recoverability of Goodwill
Goodwill represented $640,714 and $639,097 of our $28,946,607
and $27,019,862of total assets as of December31, 2012 and 2011,
respectively. We review our goodwill annually in the fourth quarter
for impairment or more frequently if indicators of impairment exist.
Such indicators include, but are not limited to, a signi cant adverse
change in legal factors, adverse action or assessment by a regulator,
unanticipated competition, loss of key personnel or a signi cant decline
in our expected future cash  ows due to changes in company-speci c
factors or the broader business climate.  e evaluation of such factors
requires considerable judgment. Any adverse change in these factors
could have a signi cant impact on the recoverability of goodwill and
could have a material impact on our consolidated  nancial statements.
We test goodwill for impairment at the reporting unit level and have
concluded that our reporting units for goodwill testing are equivalent
to our operating segments.
 e following table illustrates the amount of goodwill carried at each reporting unit:
December31,
2012 2011
Assurant Solutions $ 381,262 $ 379,645
Assurant Specialty Property 259,452 259,452
Assurant Health — —
Assurant Employee Bene ts — —
TOTAL $ 640,714 $ 639,097
For each reporting unit, we  rst compare its estimated fair value with
its net book value. If the estimated fair value exceeds its net book value,
goodwill is deemed not to be impaired, and no further testing is necessary.
If the net book value exceeds its estimated fair value, we would then
perform a second test to calculate the amount of impairment, if any.
To determine the amount of any impairment, we would determine the
implied fair value of goodwill in the same manner as if the reporting
unit were being acquired in a business combination. Speci cally, we
would determine the fair value of all of the assets and liabilities of
the reporting unit, including any unrecognized intangible assets, in a
hypothetical calculation that yields the implied fair value of goodwill.
If the implied fair value of goodwill is less than the recorded goodwill,
we would record an impairment charge for the di erence.
During September2011, the FASB issued amended guidance for
goodwill and other intangibles.  is guidance provides the option to
 rst assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely
than not that the fair value of a reporting unit is less than its carrying
amount. If, after assessing the totality of events and circumstances, an
entity determines that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing
the two-step impairment test is unnecessary. However, if an entity
concludes otherwise, then it is required to perform the  rst step of
the two-step impairment test, as described above. During 2011, the
Company chose this option for Assurant Specialty Property, but not
for Assurant Solutions. During 2012, the Company performed the
Step 1 test for both reporting units.
In cases where Step 1 testing was performed, the following describes
the valuation methodologies used in 2012 and 2011 to derive the
estimated fair value of the reporting units.
For each reporting unit, we identi ed a group of peer companies,
which have operations that are as similar as possible to the reporting
unit. 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  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 2012 Step 1 test, the Company concluded that the
estimated fair value of the Assurant Solutions reporting unit exceeded
its net book value by 10.5%, while the Assurant Specialty Property
reporting unit exceeded its net book value by 17.4%.
Following the 2011 Step 1 test, the Company concluded that the
estimated fair value of the Assurant Solutions reporting unit exceeded
its net book value by 19.2%. In undertaking our qualitative assessment
of the Specialty Property reporting unit in 2011, we considered macro-
economic, industry and reporting unit-speci c factors.  ese included
(i)the e ect of the current interest rate environment on our cost of
capital; (ii)Assurant Specialty Property’s sustaining market share over
the year; (iii)lack of turnover in key management; (iv)2011 actual
performance as compared to expected 2011 performance from our
2010 Step 1 assessment; and, (v)the overall market position and share
price of Assurant, Inc.