Assurant 2012 Annual Report Download - page 59

ASSURANT, INC.2012 Form10-K 51
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Major categories of net investment income were as follows:
Years Ended December31,
2012
2011 2010
Fixed maturity securities $ 553,668 $ 565,486 $ 572,909
Equity securities 24,771 29,645 33,864
Commercial mortgage loans on real estate 79,108 80,903 88,894
Policy loans 3,204 3,102 3,248
Short-term investments 4,889 5,351 5,259
Other investments 54,581 21,326 19,019
Cash and cash equivalents 15,323 7,838 5,577
Total investment income 735,544 713,651 728,770
Investment expenses (22,416) (24,119) (25,580)
NET INVESTMENT INCOME $ 713,128 $ 689,532 $ 703,190
Net investment income increased $23,596, or 3%, to $713,128 at
December31, 2012 from $689,532 at December31, 2011.  e increase
is primarily due to $28,974 of increased investment income from real
estate joint venture partnerships. Excluding the net investment income
from real estate joint venture partnerships, net investment income
decreased $5,378, re ecting lower investment yields.
Net investment income decreased $13,658, or 2%, to $689,532 at
December31, 2011 from $703,190 at December31, 2010.  e
decrease is due to lower overall investment yields.
 e net unrealized gain position increased to $1,496,027 as of
December31, 2012, compared to $1,074,135 as of December31,
2011 primarily due to declining U.S. Treasury yields.
As of December31, 2012, the Company owned $235,998 of securities
guaranteed by  nancial guarantee insurance companies. Included in
this amount was $219,239 of municipal securities, with a credit rating
of A both with and without the guarantee.
Our states, municipalities and political subdivisions holdings are
highly diversi ed across the United States and Puerto Rico, with no
individual state’s exposure (including both general obligation and
revenue securities) exceeding 0.5% of the overall investment portfolio
as of December31, 2012 and December31, 2011. At December31,
2012 and December31, 2011, the securities include general obligation
and revenue bonds issued by states, cities, counties, school districts
and similar issuers, including $168,705 and $164,347, respectively, of
advance refunded or escrowed-to-maturity bonds (collectively referred
to as “pre-refunded bonds”), which are bonds for which an irrevocable
trust has been established to fund the remaining payments of principal
and interest. As of December31, 2012 and December31, 2011, revenue
bonds account for 52% and 51% of the holdings, respectively. Excluding
pre-refunded bonds, sales tax, highway, water, fuel sales, transit and
miscellaneous (which includes bond banks,  nance authorities and
appropriations) provide for 82% and 79% of the revenue sources, as
of December31, 2012 and December31, 2011, respectively.
 e Company’s investments in foreign government  xed maturity
securities are held mainly in countries and currencies where the Company
has policyholder liabilities, which allow the assets and liabilities to be
more appropriately matched. At December31, 2012, approximately
67%, 15%, and 6% of the foreign government securities were held in
the Canadian government/provincials and the governments of Brazil
and Germany, respectively. At December31, 2011, approximately
63%, 13% and 7% of the foreign government securities were held in
the Canadian government/provincials and the governments of Brazil
and Germany, respectively. No other country represented more than
5% of our foreign government securities as of December31, 2012
and December31, 2011.
 e Company has European investment exposure in its corporate  xed
maturity and equity securities of $1,054,820 with an unrealized gain
of $122,420 at December31, 2012 and $868,012 with an unrealized
gain of $61,387 at December31, 2011. Approximately 28% and
31% of the corporate European exposure are held in the  nancial
industry at December31, 2012 and December31, 2011, respectively.
No European country represented more than 5% of the fair value of
our corporate securities as of December31, 2012 and December31,
2011. Approximately 5% of the fair value of the corporate European
securities are pound and euro-denominated and are not hedged to U.S.
dollars, but, held to support those foreign-denominated liabilities. Our
international investments are managed as part of our overall portfolio
with the same approach to risk management and focus on diversi cation.
 e Company has exposure to sub-prime and related mortgages
within our  xed maturity securities portfolio. At December31, 2012,
approximately 3.3% of our residential mortgage-backed holdings
had exposure to sub-prime mortgage collateral.  is represented
approximately 0.2% of the total  xed income portfolio and 1.0% of
the total unrealized gain position. Of the securities with sub-prime
exposure, approximately 15.0% are rated as investment grade. All
residential mortgage-backed securities, including those with sub-prime
exposure, are reviewed as part of the ongoing other-than-temporary
impairment monitoring process.
As required by the fair value measurements and disclosures guidance,
the Company has identi ed and disclosed its  nancial assets in a fair
value hierarchy, which consists of the following three levels:
• Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company can access.
• Level 2 inputs utilize other than quoted prices included in Level
1 that are observable for the asset, either directly or indirectly, for
substantially the full term of the asset. Level 2 inputs include quoted
prices for similar assets in active markets, quoted prices for identical
or similar assets in markets that are not active and inputs other than
quoted prices that are observable in the marketplace for the asset.
 e observable inputs are used in valuation models to calculate the
fair value for the asset.