Assurant 2012 Annual Report Download - page 61

ASSURANT, INC.2012 Form10-K 53
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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’s assets consist primarily
of the capital stock of our subsidiaries. Accordingly, our holding
company’s 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.
It is possible that regulators or 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 February24, 2012,
Moody’s Investor Services (“Moody’s”) a rmed Assurant Inc.’s Senior
Debt rating of Baa2, but changed the outlook on this rating to stable
from negative. 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 the ratings of two of our life and health
insurance subsidiaries to stable from negative. A negative outlook
remains on the ratings of Assurant’s two other rated life and health
subsidiaries due to concerns about the impact of the A ordable Care
Act. On December11, 2012, Standard and Poor’s (“S&P”) revised
the outlook on the  nancial strength ratings of American Bankers Life
Assurance Company of Florida and American Memorial Life Insurance
Company from stable to positive. 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 2013, the maximum amount of dividends our U.S.
domiciled insurance subsidiaries could pay, under applicable laws
and regulations without prior regulatory approval, is approximately
$524,000. In total, we received dividends or returns of capital, net of
infusions, of $581,908 from our subsidiaries during 2012. We expect
2013 dividends from the operating segments to approximate their
earnings subject to the growth of the businesses, rating agency and
regulatory capital requirements and investment performance.
Liquidity
As of December31, 2012, we had $781,754 in holding company capital.
We use the term “holding company capital” to represent cash and
other liquid marketable securities held at Assurant, Inc., out of a total
of $950,826, that we are not otherwise holding for a speci c purpose
as of the balance sheet date, but can be used for stock repurchases,
stockholder dividends, acquisitions, and other corporate purposes.
$250,000 of the $781,754 of holding company capital is intended to
serve as a bu er against remote risks (such as large-scale hurricanes).
Dividends or returns of capital, net of infusions, made to the holding
company from its operating companies were $581,908, $523,881 and
$832,300 for the years ended December31, 2012, 2011 and 2010,
respectively. We use these cash in ows primarily to pay expenses, to
make interest payments on indebtedness, to make dividend payments
to our stockholders, to make subsidiary capital contributions, to fund
acquisitions and to repurchase our outstanding shares.
In addition to paying expenses and making interest payments on
indebtedness, our capital management strategy provides for several
uses of the cash generated by our subsidiaries, including without
limitation, returning capital to shareholders through share repurchases
and dividends, investing in our businesses to support growth in targeted
areas, and making prudent and opportunistic acquisitions. During
2012, 2011 and 2010 we made share repurchases and paid dividends
to our stockholders of $472,103, $600,314 and $602,568, respectively.
 e primary sources of funds for our subsidiaries consist of premiums and
fees collected, proceeds from the sales and maturity of investments and
net investment income. Cash is primarily used to pay insurance claims,
agent commissions, operating expenses and taxes. We generally invest
our subsidiaries’ excess funds in order to generate investment income.
We conduct periodic asset liability studies to measure the duration of
our insurance liabilities, to develop optimal asset portfolio maturity
structures for our signi cant lines of business and ultimately to assess
that cash  ows are su cient to meet the timing of cash needs.  ese
studies are conducted in accordance with formal company-wide Asset
Liability Management (“ALM”) guidelines.
To complete a study for a particular line of business, models are
developed to project asset and liability cash  ows and balance sheet items
under a large, varied set of plausible economic scenarios.  ese models
consider many factors including the current investment portfolio, the
required capital for the related assets and liabilities, our tax position and
projected cash  ows from both existing and projected new business.
Alternative asset portfolio structures are analyzed for signi cant lines of
business. An investment portfolio maturity structure is then selected from
these pro les given our return hurdle and risk preference. Sensitivity testing of
signi cant liability assumptions and new business projections is also performed.
Our liabilities generally have limited policyholder optionality, which
means that the timing of payments is relatively insensitive to the interest
rate environment. In addition, our investment portfolio is largely
comprised of highly liquid  xed maturity securities with a su cient
component of such securities invested that are near maturity which
may be sold with minimal risk of loss to meet cash needs.  erefore,
we believe we have limited exposure to disintermediation risk.