Assurant 2013 Annual Report Download - page 70

ASSURANT, INC. – 2013 Form 10-K58
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 affect our capital resources.
On November 18, 2013, A.M. Best affi rmed the fi nancial
strength ratings of Assurant’s businesses with a stable outlook.
At that time, A.M. Best also affi rmed Assurant’s debt rating
of bbb and revised the outlook from stable to positive.
On March 12, 2013, Moody’s Investor Services (“Moody’s”)
downgraded the insurance fi nancial strength ratings of two
of Assurant’s rated life and health subsidiaries from A3
to Baa1 due to pressures on earnings and concerns about
the impact of the Affordable Care Act. Moody’s outlook on
these two subsidiaries remains negative. On June 24, 2013,
Standard and Poor’s (“S&P”) upgraded the Senior Debt rating
of Assurant, Inc from BBB to BBB+ and revised the outlook on
the rating from positive to stable. In addition, S&P upgraded
the fi nancial strength ratings of American Security Insurance
Company, American Bankers Insurance Company of Florida,
American Bankers Life Assurance Company of Florida and
American Memorial Life from A— to A and revised the outlook
on the ratings from positive to stable. The upgrades cited
Assurant’s strong earnings capability based on its well-
diversifi ed competitive position and very strong capital
adequacy, as well as the company’s strong fi nancial fl exibility
supported by its strong leverage and coverage metrics. 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 fi nancial strength of our insurance company
subsidiaries, and a decline in these ratings could affect our
standing in the insurance industry and cause our sales and
earnings to decrease.” For 2014, the maximum amount of
dividends our U.S. domiciled insurance subsidiaries could
pay, under applicable laws and regulations without prior
regulatory approval, is approximately $484,000.
Liquidity
As of December 31, 2013, we had $689,982 in holding company
capital, excluding $467,330 from the March 28, 2013 debt
offering which was used to repay debt that matured in
February 2014. We use the term “holding company capital”
to represent cash and other liquid marketable securities
held at Assurant, Inc., out of a total of $1,414,816, that we
are not otherwise holding for a specifi 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 $689,982 of holding company
capital is intended to serve as a buffer 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 $607,295, $581,908, and
$523,881 for the years ended December 31, 2013, 2012, and
2011, respectively. We use these cash infl 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 2013, 2012
and 2011 we made share repurchases and paid dividends
to our stockholders of $472,308, $472,103 and $600,314,
respectively. We expect 2014 dividends from the operating
segments to approximate their earnings subject to the growth
of the businesses, rating agency and regulatory capital
requirements as well as investment performance.
The 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 signifi cant lines
of business and ultimately to assess that cash fl ows are
suffi cient to meet the timing of cash needs. These 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 fl ows and
balance sheet items under a large, varied set of plausible
economic scenarios. These models consider many factors
including the current investment portfolio, the required
capital for the related assets and liabilities, our tax position
and projected cash fl ows from both existing and projected
new business.
Alternative asset portfolio structures are analyzed for
signifi cant lines of business. An investment portfolio maturity
structure is then selected from these profi les given our return
hurdle and risk preference. Sensitivity testing of signifi 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
fi xed maturity securities with a suffi cient component of such
securities invested that are near maturity which may be sold
with minimal risk of loss to meet cash needs. Therefore, we
believe we have limited exposure to disintermediation risk.
Generally, our subsidiaries’ premiums, fees and investment
income, along with planned asset sales and maturities,
provide suffi cient cash to pay claims and expenses. However,
there may be instances when unexpected cash needs arise in
excess of that available from usual operating sources. In such
instances, we have several options to raise needed funds,
including selling assets from the subsidiaries’ investment