Assurant 2012 Annual Report Download - page 60

ASSURANT, INC.2012 Form10-K52
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Level 3 inputs are unobservable but are signi cant to the fair value
measurement for the asset, and include situations where there is little,
if any, market activity for the asset.  ese inputs re ect management’s
own assumptions about the assumptions a market participant would
use in pricing the asset.
A review of fair value hierarchy classi cations is conducted on a
quarterly basis. Changes in the observability of valuation inputs may
result in a reclassi cation of levels for certain securities within the fair
value hierarchy.
 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.
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.
A non-pricing service source prices certain privately placed corporate
bonds 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. A non-pricing service source prices our CPI Caps 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.
Management evaluates the following factors in order to determine
whether the market for a  nancial asset is inactive.  e factors include,
but are not limited to:
• ere are few recent transactions,
•Little information is released publicly,
•  e available prices vary signi cantly over time or among market
participants,
• e prices are stale (i.e., not current), and
• e magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination
of the Company’s  nancial assets.
 e Company generally obtains one price for each  nancial asset.  e
Company performs a monthly analysis to assess if the evaluated prices
represent a reasonable estimate of their fair value.  is process involves
quantitative and qualitative analysis and is overseen by investment and
accounting professionals. Examples of procedures performed include,
but are not limited to, initial and on-going review of pricing service
methodologies, review of the prices received from the pricing service,
review of pricing statistics and trends, and comparison of prices for
certain securities with two di erent appropriate price sources for
reasonableness. Following this analysis, the Company generally uses the
best estimate of fair value based upon all available inputs. On infrequent
occasions, a non-pricing service source may be more familiar with the
market activity for a particular security than the pricing service. In
these cases the price used is taken from the non-pricing service source.
 e pricing service provides information to indicate which securities
were priced using market observable inputs so that the Company can
properly categorize our  nancial assets in the fair value hierarchy.
Collateralized Transactions
 e Company engages in transactions in which  xed maturity securities,
primarily bonds issued by the U.S. government, government agencies
and authorities, and U.S. corporations, are loaned to selected broker/
dealers. Collateral, greater than or equal to 102% of the fair value of
the securities lent, plus accrued interest, is received in the form of
cash and cash equivalents held by a custodian bank for the bene t
of the Company.  e use of cash collateral received is unrestricted.
 e Company reinvests the cash collateral received, generally in
investments of high credit quality that are designated as available-for-
sale.  e Company monitors the fair value of securities loaned and
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, 2012 and 2011, our collateral held under securities
lending, of which its use is unrestricted, was $94,729 and $95,221,
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 $94,714 and $95,494, 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
gain (loss) and is included as part of AOCI. All securities are in an
unrealized gain position as of December31, 2012. All securities with
unrealized losses as of December31, 2011 had been in a continuous
loss position for twelve months or longer.  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.