Assurant 2013 Annual Report Download - page 69

ASSURANT, INC. – 2013 Form 10-K 57
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management evaluates the following factors in order to
determine whether the market for a fi nancial asset is inactive.
The factors include, but are not limited to:
•There are few recent transactions,
•Little information is released publicly,
• The available prices vary signifi cantly over time or among
market participants,
•The prices are stale (i.e., not current), and
•The magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value
determination of the Company’s fi nancial assets.
The Company generally obtains one price for each fi nancial
asset. The Company performs a monthly analysis to assess if
the evaluated prices represent a reasonable estimate of their
fair value. This 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
different 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. The pricing
service provides information to indicate which securities
were priced using market observable inputs so that the
Company can properly categorize our fi nancial assets in
the fair value hierarchy.
Collateralized Transactions
The Company engages in transactions in which fi xed maturity
securities, primarily bonds issued by the U.S. government and
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 benefi t of the
Company. The use of cash collateral received is unrestricted.
The Company reinvests the cash collateral received, generally
in investments of high credit quality that are designated as
available-for-sale. The Company monitors the fair value of
securities loaned and the collateral received, with additional
collateral obtained, as necessary. The 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, 2013 and 2012, our collateral held
under securities lending, of which its use is unrestricted,
was $95,215 and $94,729, 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 $95,206 and $94,714,
respectively, and is included in the consolidated balance
sheets under the obligation under securities agreements.
The difference between the collateral held and obligations
under securities lending is recorded as an unrealized gain
and is included as part of AOCI. All securities are in an
unrealized gain position as of December 31, 2013 and 2012.
The 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 fl ows from fi 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 fl ows from investing activities.
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 fl 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. The 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
signifi cant regulatory restrictions. The dividend requirements
and regulations vary from state to state and by type of
insurance provided by the applicable subsidiary. These 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 Industry—
Changes in regulation may reduce our profi 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 fi nancial
strength ratings from A.M. Best.