10-Q 1 aiz-2016033110q.htm 10-Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016
OR 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Assurant, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
001-31978
 
39-1126612
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
28 Liberty Street, 41st Floor
New York, New York 10005
(212) 859-7000
(Address, including zip code, and telephone number, including area code, of Registrant’s Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
The number of shares of the registrant’s Common Stock outstanding at April 28, 2016 was 61,936,907.
 
 
 
 
 



ASSURANT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
TABLE OF CONTENTS
 
Item
Number
 
Page
Number
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
6.
 
 
 
 
Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except number of shares and per share amounts.

1


Assurant, Inc.
Consolidated Balance Sheets (unaudited)
At March 31, 2016 and December 31, 2015
 
 
 



 
March 31, 2016
 
December 31, 2015
 
(in thousands except number of shares and per
share amounts)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities available for sale, at fair value (amortized cost - $8,230,871 in 2016 and
$9,470,795 in 2015)
$
9,039,747

 
$
10,215,328

Equity securities available for sale, at fair value (cost - $361,537 in 2016 and $450,563 in 2015)
403,702

 
500,057

Commercial mortgage loans on real estate, at amortized cost
872,196

 
1,151,256

Policy loans
41,124

 
43,858

Short-term investments
449,691

 
508,950

Other investments
618,651

 
575,323

Total investments
11,425,111

 
12,994,772

Cash and cash equivalents
2,060,815

 
1,288,305

Premiums and accounts receivable, net
1,331,527

 
1,260,717

Reinsurance recoverables
8,689,823

 
7,470,403

Accrued investment income
114,572

 
129,743

Deferred acquisition costs
3,079,611

 
3,150,934

Property and equipment, at cost less accumulated depreciation
312,324

 
298,414

Tax receivable
—

 
24,176

Goodwill
839,766

 
833,512

Value of business acquired
38,950

 
41,154

Other intangible assets, net
274,131

 
277,163

Other assets
401,111

 
469,005

Assets held in separate accounts
1,719,454

 
1,798,104

Total assets
$
30,287,195

 
$
30,036,402

Liabilities
 
 
 
Future policy benefits and expenses
$
9,723,211

 
$
9,466,694

Unearned premiums
6,308,939

 
6,423,720

Claims and benefits payable
3,341,718

 
3,896,719

Commissions payable
354,965

 
393,260

Reinsurance balances payable
110,056

 
132,728

Funds held under reinsurance
101,400

 
94,417

Deferred gain on disposal of businesses
564,122

 
92,327

Accounts payable and other liabilities
1,825,894

 
2,049,810

Tax payable
258,087

 
—

Debt
1,414,704

 
1,164,656

Liabilities related to separate accounts
1,719,454

 
1,798,104

Total liabilities
25,722,550

 
25,512,435

Commitments and contingencies (Note 16)

 

Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 62,643,447 and 65,850,386
shares outstanding at March 31, 2016 and December 31, 2015, respectively
1,500

 
1,497

Additional paid-in capital
3,152,977

 
3,148,409

Retained earnings
5,044,544

 
4,856,674

Accumulated other comprehensive income
225,240

 
118,549

Treasury stock, at cost; 86,945,291 and 83,523,031 shares at March 31, 2016 and December 31,
2015, respectively
(3,859,616
)
 
(3,601,162
)
Total stockholders’ equity
4,564,645

 
4,523,967

Total liabilities and stockholders’ equity
$
30,287,195

 
$
30,036,402


See the accompanying notes to the consolidated financial statements

2


Assurant, Inc.
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2016 and 2015
 
 
 

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands except number of shares and per share amounts)
Revenues
 
 
 
Net earned premiums
$
1,415,238

 
$
2,159,562

Fees and other income
357,690

 
279,562

Net investment income
135,707

 
152,273

Net realized gains on investments, excluding other-than-temporary impairment losses
162,366

 
6,525

Total other-than-temporary impairment losses
(311
)
 
(3,208
)
Portion of net (gain) loss recognized in other comprehensive income, before taxes
(337
)
 
638

Net other-than-temporary impairment losses recognized in earnings
(648
)
 
(2,570
)
Amortization of deferred gain on disposal of businesses
47,596

 
3,258

Gain on pension plan curtailment
29,578

 
—

Total revenues
2,147,527

 
2,598,610

Benefits, losses and expenses
 
 
 
Policyholder benefits
543,816

 
1,210,727

Amortization of deferred acquisition costs and value of business acquired
334,342

 
369,003

Underwriting, general and administrative expenses
917,359

 
921,909

Interest expense
14,503

 
13,778

Total benefits, losses and expenses
1,810,020

 
2,515,417

Income before provision for income taxes
337,507

 
83,193

Provision for income taxes
117,189

 
33,149

Net income
$
220,318

 
$
50,044

Earnings Per Share
 
 
 
Basic
$
3.38

 
$
0.72

Diluted
$
3.34

 
$
0.71

Dividends per share
$
0.50

 
$
0.27

Share Data
 
 
 
Weighted average shares outstanding used in basic per share calculations
65,086,935

 
69,770,224

Plus: Dilutive securities
833,611

 
987,325

Weighted average shares used in diluted per share calculations
65,920,546

 
70,757,549

See the accompanying notes to the consolidated financial statements

3


Assurant, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended March 31, 2016 and 2015
 
 
 

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Net income
$
220,318

 
$
50,044

Other comprehensive income (loss):
 
 
 
Change in unrealized gains on securities, net of taxes of $(14,836) and $(28,349),
   respectively
29,872

 
57,459

Change in other-than-temporary impairment gains, net of taxes of $674 and $481,
   respectively
(1,251
)
 
(894
)
Change in foreign currency translation, net of taxes of $(1,609) and $2,654, respectively
11,860

 
(65,951
)
Pension plan curtailment and amortization of pension and postretirement unrecognized
   net periodic benefit cost, net of taxes of $(35,651) and $(1,409), respectively
66,210

 
2,616

Total other comprehensive income (loss)
106,691

 
(6,770
)
Total comprehensive income
$
327,009

 
$
43,274

See the accompanying notes to the consolidated financial statements

4


Assurant, Inc.
Consolidated Statement of Stockholders’ Equity (unaudited)
From December 31, 2015 through March 31, 2016
 
 
 

 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Total
 
(in thousands)
Balance at December 31, 2015
$
1,497

 
$
3,148,409

 
$
4,856,674

 
$
118,549

 
$
(3,601,162
)
 
$
4,523,967

Stock plan exercises
3

 
(3,781
)
 
—

 
—

 
—

 
(3,778
)
Stock plan compensation
  expense
—

 
6,514

 
—

 
—

 
—

 
6,514

Change in tax benefit from
  share-based payment
  arrangements
—

 
1,835

 
—

 
—

 
—

 
1,835

Dividends
—

 


 
(32,448
)
 
—

 
—

 
(32,448
)
Acquisition of common
  stock
—

 
—

 
—

 
—

 
(258,454
)
 
(258,454
)
Net income
—

 
—

 
220,318

 
—

 
—

 
220,318

Other comprehensive
 income
—

 
—

 
—

 
106,691

 
—

 
106,691

Balance, March 31, 2016
$
1,500

 
$
3,152,977

 
$
5,044,544

 
$
225,240

 
$
(3,859,616
)
 
$
4,564,645

 
See the accompanying notes to the consolidated financial statements

5


Assurant, Inc.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2016 and 2015
 
 
 

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Net cash used in operating activities
$
(339,030
)
 
$
(177,666
)
Investing activities
 
 
 
Sales of:
 
 
 
Fixed maturity securities available for sale
707,385

 
452,944

Equity securities available for sale
112,051

 
14,660

Other invested assets
3,554

 
6,685

Property and equipment and other
20

 
10

Subsidiary, net of cash transferred (2)
914,811

 
65,002

Maturities, calls, prepayments, and scheduled redemption of:
 
 
 
Fixed maturity securities available for sale
197,638

 
179,339

Commercial mortgage loans on real estate
25,984

 
45,887

Purchases of:
 
 
 
Fixed maturity securities available for sale
(750,742
)
 
(708,069
)
Equity securities available for sale
(74,925
)
 
(37,886
)
Commercial mortgage loans on real estate
(7,500
)
 
(36,180
)
Other invested assets
(18,393
)
 
(5,303
)
Property and equipment and other
(22,750
)
 
(22,157
)
Subsidiary, net of cash transferred (3)
(10,843
)
 
—

Equity interest (1)
—

 
(457
)
Change in short-term investments
55,539

 
95,250

Change in policy loans
1,159

 
1,544

Change in collateral held/pledged under securities agreements
—

 
2,746

Net cash provided by investing activities
1,132,988

 
54,015

Financing activities
 
 
 
Issuance of debt
249,625

 
—

Change in tax benefit from share-based payment arrangements
1,835

 
1,559

Acquisition of common stock
(245,804
)
 
(84,329
)
Dividends paid
(32,448
)
 
(18,834
)
Change in obligation under securities agreements
—

 
(2,746
)
Net cash used in financing activities
(26,792
)
 
(104,350
)
Effect of exchange rate changes on cash and cash equivalents
(514
)
 
(22,277
)
Reversal of Cash included in business classified as held for sale
5,858

 
(3,213
)
Change in cash and cash equivalents
772,510

 
(253,491
)
Cash and cash equivalents at beginning of period
1,288,305

 
1,318,656

Cash and cash equivalents at end of period
$
2,060,815

 
$
1,065,165

 
(1)
Relates to the purchase of equity interest in Iké Asistencia.
(2)
Relates to the sale of Assurant's Employee Benefits segment mainly through reinsurance transactions and supplemental and small group self-funded business.
(3)
Relates primarily to an immaterial acquisition and the purchase of renewal rights to the National Flood Insurance block of business of Nationwide Mutual Insurance Company.
See the accompanying notes to the consolidated financial statements

6

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 





1. Nature of Operations
Assurant, Inc. (the “Company”) is a holding company whose subsidiaries globally provide risk management solutions, protecting where consumers live and the goods they buy.
The Company is traded on the New York Stock Exchange under the symbol "AIZ."
Through its operating subsidiaries, the Company provides mobile device protection; vehicle protection; pre-funded funeral insurance; renters insurance; lender-placed homeowners insurance; and mortgage valuation and field services.
As previously announced, the Company will substantially exit the health insurance market by the end of 2016 and sold its Assurant Employee Benefits segment on March 1, 2016 mainly through a series of reinsurance transactions with Sun Life Assurance Company of Canada, a subsidiary of Sun Life Financial Inc. (“Sun Life”). See Notes 4 and 5, respectively, for more information.
2. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements.
The interim financial data as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The unaudited interim consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together, the “Affordable Care Act”) introduced new and significant premium stabilization programs in 2014. These programs require the Company to record amounts to our consolidated financial statements based on assumptions and estimates that could materially change as experience develops until the company exits the Health business and settles related receivables later in 2016.
Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
3. Recent Accounting Pronouncements
Adopted
On January 1, 2016 the Company adopted the amended guidance on presentation of debt issuance costs. This amended guidance requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected by the amendments. The adoption of this new presentation guidance did not impact the Company’s financial position or results of operations.
On January 1, 2016, the Company adopted the new consolidation guidance that affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The adoption of this new consolidation guidance did not have an impact on the Company’s financial position and results of operations.

7

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




Not Yet Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued amended guidance on employee share-based stock compensation. This amended guidance provides areas of simplification in several aspects of accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amended guidance is effective in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2017. Early adoption is permitted in any interim or annual period. The Company is evaluating the requirements of this amended share-based stock compensation guidance and the potential impact on the Company’s financial position and results of operations.
In February 2016, the FASB issued new guidance on leases. The new guidance will replace the current lease guidance. The new guidance requires that entities recognize the assets and liabilities associated with leases on the balance sheet and to disclose key information about leasing arrangements. The new guidance is effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2019. Early adoption is permitted. The Company is evaluating the requirements of this new lease guidance and the potential impact on the Company’s financial position and results of operations.
In January 2016, the FASB issued amended guidance on the measurement and classification of financial instruments. This amended guidance requires that all equity investments be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the fair value option has been elected for financial liabilities. The amendments eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, however public business entities will be required to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. In addition, the new guidance requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The amended guidance is effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Therefore, the Company is required to adopt the guidance on January 1, 2018. For the provision related to presentation of financial liabilities, early adoption is permitted for financial statements that have not been previously issued. The Company is evaluating the requirements of this amended measurement and classification of financial instruments guidance and the potential impact on the Company’s financial position and results of operations.
In May 2014, the FASB issued amended guidance on revenue recognition. In March and April 2016, the FASB issued implementation amendments to the May 2014 amended revenue recognition guidance. The amended guidance, including the implementation amendments (together, the “amended guidance”), affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Insurance contracts are within the scope of other standards and therefore are specifically excluded from the scope of the amended revenue recognition guidance. The core principle of the amended guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the entity applies a five step process outlined in the amended guidance. The amended guidance also includes a cohesive set of disclosure requirements. In August 2015, the FASB issued guidance to defer the effective date of the revenue recognition guidance. The amended guidance is effective for interim and annual periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Therefore, the Company is required to adopt the guidance on January 1, 2018. An entity can choose to apply the amended guidance using either the full retrospective approach or a modified retrospective approach. The Company is evaluating the requirements of the revenue recognition guidance as it relates to its non-insurance contract revenue and the potential impact on the Company’s financial position and results of operations.
4. Reorganization
On June 7, 2015, the Company concluded its comprehensive review of strategic alternatives for the Assurant Health business segment and decided to sharpen its focus on housing and lifestyle specialty protection products and services. The Company expects to substantially complete its exit from the health insurance market by the end of 2016. As part of this process,

8

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




Assurant reinsured its supplemental and small-group self-funded lines of business and sold certain legal entities to National General Holdings Corp. ("National General"), effective October 1, 2015.
The following table presents information regarding exit-related charges:
 
Severance and retention
 
Long-lived asset impairments and contract and lease terminations
 
Other transaction costs
 
Total
Balance at January 1, 2015
$
—

 
$
—

 
$
—

 
$
—

Charges
—

 
—

 
—

 
—

Cash payments
—

 
—

 
—

 
—

Balance at March 31, 2015
$
—

 
$
—

 
$
—

 
$
—

Charges
14,435

 
22,307

 
4,996

 
41,738

Non-cash adjustment
—

 
(21,247
)
 
(2,947
)
 
(24,194
)
Cash payments
—

 
—

 
—

 
—

Balance at June 30, 2015
$
14,435

 
$
1,060

 
$
2,049

 
$
17,544

Charges
20,927

 
13

 
5,795

 
26,735

Cash payments
(10,728
)
 
(168
)
 
(4,338
)
 
(15,234
)
Balance at September 30, 2015
$
24,634

 
$
905

 
$
3,506

 
$
29,045

Charges
16,344

 
17

 
795

 
17,156

Cash payments
(4,413
)
 
(152
)
 
(3,808
)
 
(8,373
)
Balance at December 31, 2015
$
36,565

 
$
770

 
$
493

 
$
37,828

Charges
14,561

 
4,903

 
(47
)
 
19,417

Cash payments
(16,181
)
 
(136
)
 
(436
)
 
(16,753
)
Balance at March 31, 2016
$
34,945

 
$
5,537

 
$
10

 
$
40,492

 
 
 
 
 
 
 
 
Amount expected to be incurred, including charges to
  date
$
82,668

 
$
27,240

 
$
11,539

 
$
121,447

 
 
 
 
 
 
 
 
Premium deficiency charges
 
 
 
 
 
 
$
182,627

Total amount expected to be incurred
 
 
 
 
 
 
$
304,074

Amounts in the above table are primarily included in underwriting, general and administrative expenses on the Consolidated Statements of Operations.
The total amount expected to be incurred is an estimate that is subject to change as facts and circumstances evolve. For instance, severance and retention estimates could change if employees previously identified for separation resign from the Company before the date through which they are required to be employed in order to receive severance and retention benefits.
The premium deficiency reserve liability increased $13,527 from $78,047 at December 31, 2015 to $91,574 at March 31, 2016. The increase is due to reserve margin released with the associated reserve run off and higher than expected policy lapse rates.
Future cash payments, for these exit-related charges, are expected to be substantially complete by 2016.
5. Dispositions
On March 1, 2016, the Company completed the sale of its Assurant Employee Benefits segment through a series of transactions with Sun Life, for net cash consideration of $926,174 and contingent consideration of $16,000 related to specified

9

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




account renewals. The transaction was primarily structured as a reinsurance arrangement, as well as the sale of certain legal entities that included ceding commission and other consideration. The reinsurance transaction does not extinguish the Company's primary liability on the policies issued or assumed by subsidiaries that are parties to the reinsurance agreements, thus any gains associated with the prospective component of the reinsurance transaction are deferred and amortized over the contract period, including contractual renewal periods, in proportion to the amount of insurance coverage provided. The Company also has an obligation to continue to write and renew certain policies for a period of time until Sun Life commences policy writing and renewal.
The Company was required to allocate the proceeds considering the relative fair value of the transaction components, including the sale of certain legal entities, the reinsurance for existing claims (accounted for as retroactive reinsurance) and reinsurance for inforce policies with remaining terms and future business (primarily accounted for as prospective reinsurance). The Company estimated a gain of $638,517 based on proceeds compared to the relative net assets transferred and other expenses incurred along with realized gains on invested assets transferred. Of this amount, $120,077 was recognized at the close of the transaction and $518,440 was required to be deferred. The deferred amount will primarily be recognized as revenue over the contract period in proportion to the amount of insurance coverage provided, including estimated contractual renewals pursuant to rate guarantees. In the first quarter 2016, the Company recognized $44,593 of amortization of the deferred gain for the month of March 2016. The total pre-tax gain recognized during the first quarter 2016 was $164,670.
Over 60% of the remaining deferred gain of $473,847 as of March 31, 2016 is expected to be earned in the remainder of 2016 and over 90% is expected to be earned by the end of 2018. The ultimate amortization pattern will be dependent on a number of factors including the exact timing of when Sun Life commences directly writing and renewing policies and the sales and persistency on business the Company is obligated to write and renew in the interim.
The following represents a summary of the pre-tax gain recognized in the first quarter 2016 by transaction component, as well as the related classification within the financial statements:
Total expected gain at close
$
638,517

 
 
 
 
Transaction closing gains on March 1, 2016:
 
 
Gain on sale of entities, net of transaction costs
$
41,098

 
Novations, resulting in recognized gains
60,913

(b)
Loss on retroactive reinsurance component, before realized gains
(128,661
)
(c)
Net loss prior to realized gains on transferred securities supporting retroactive component
(26,650
)
(a)
Realized gains on transferred securities supporting retroactive component
146,727

(c)
Net gain realized as of March 1, 2016
$
120,077

 
 
 
 
Deferred gain as of March 1, 2016
$
518,440

 
Amortization of deferred gain for March 2016
44,593

(d)
Deferred gain as of March 31, 2016
$
473,847

(e)
Total net gains realized for the first quarter 2016
$
164,670

 
(a)
Amount classified within underwriting, general and administrative expenses within the Consolidated Statements of Operations.
(b)
Novations of certain insurance policies directly to Sun Life allowed for immediate gain recognition.
(c)
Reinsurance of existing claims liabilities requires retroactive accounting necessitating losses to be recognized immediately. However, upon transfer of the associated assets supporting the liabilities, the Company recognized realized gains which more than offset the retroactive losses. The Company was required to classify the realized gains as part of net realized gains on investments, within the Consolidated Statements of Operations.
(d)
Amount classified as amortization of deferred gain on disposal of businesses within the Consolidated Statements of Operations.
(e)
Amount classified as a component of the deferred gain on disposal of businesses within the Consolidated Balance Sheets.
The Company will review and evaluate the estimates affecting the deferred gain each period or when significant information affecting the estimates becomes known to the Company, and will adjust the revenue recognized accordingly.

10

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The Assurant Employee Benefits segment pretax income was $16,747 and $16,211 for the periods ending March 31, 2016 and 2015, respectively (excluding the aforementioned gains realized in the first quarter 2016 which are included in the Corporate & Other Segment).
6. Acquisitions
On March 14, 2016, the Company acquired certain renewal rights to the National Flood Insurance Program block of business of Nationwide Mutual Insurance Company. The estimated acquisition-date fair value of the consideration transferred totaled $20,329, which consists of an initial cash payment of $1,000 and an expected contingent payment of $19,329. The contingent consideration arrangement is based on future expected revenue. In connection with this asset acquisition, the Company recorded $20,329 of renewal rights intangible assets which are amortizable over a five-year period. The contingent payment may change over time, with any resulting adjustments required to be evaluated and recorded as adjustments through the income statement when a change in estimated payment is determined.


11

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




7. Investments
The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) of the Company's fixed maturity and equity securities as of the dates indicated: 
 
March 31, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI in
AOCI
(a)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
United States government and
  government agencies and authorities
$
171,926

 
$
6,061

 
$
(5
)
 
$
177,982

 
$
—

States, municipalities and political
  subdivisions
561,971

 
46,948

 
—

 
608,919

 
—

Foreign governments
500,754

 
75,054

 
(465
)
 
575,343

 
—

Asset-backed
3,026

 
1,291

 
(306
)
 
4,011

 
1,237

Commercial mortgage-backed
20,628

 
496

 
—

 
21,124

 
—

Residential mortgage-backed
880,676

 
61,281

 
(296
)
 
941,661

 
14,760

Corporate
6,091,890

 
675,220

 
(56,403
)
 
6,710,707

 
16,590

Total fixed maturity securities
$
8,230,871

 
$
866,351

 
$
(57,475
)
 
$
9,039,747

 
$
32,587

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
12,311

 
$
6,865

 
$
(3
)
 
$
19,173

 
$
—

Non-redeemable preferred stocks
349,226

 
37,004

 
(1,701
)
 
384,529

 
—

Total equity securities
$
361,537

 
$
43,869

 
$
(1,704
)
 
$
403,702

 
$
—

 
 
December 31, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI in
AOCI
(a)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
United States government and
  government agencies and authorities
$
150,681

 
$
3,891

 
$
(537
)
 
$
154,035

 
$
—

States, municipalities and political
  subdivisions
647,335

 
48,389

 
(94
)
 
695,630

 
—

Foreign governments
497,785

 
65,188

 
(723
)
 
562,250

 
—

Asset-backed
3,499

 
1,367

 
(204
)
 
4,662

 
1,285

Commercial mortgage-backed
22,169

 
352

 
—

 
22,521

 
—

Residential mortgage-backed
953,247

 
48,676

 
(3,409
)
 
998,514

 
15,343

Corporate
7,196,079

 
677,549

 
(95,912
)
 
7,777,716

 
17,885

Total fixed maturity securities
$
9,470,795

 
$
845,412

 
$
(100,879
)
 
$
10,215,328

 
$
34,513

Equity securities:
 
 
 
 
 
 
 
 
 
Common stocks
$
13,048

 
$
6,623

 
$
(7
)
 
$
19,664

 
$
—

Non-redeemable preferred stocks
437,515

 
45,495

 
(2,617
)
 
480,393

 
—

Total equity securities
$
450,563

 
$
52,118

 
$
(2,624
)
 
$
500,057

 
$
—

 

(a)
Represents the amount of OTTI recognized in accumulated other comprehensive income (“AOCI”). Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.
 

12

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The Company's states, municipalities and political subdivisions holdings are highly diversified across the U.S. 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 March 31, 2016 and December 31, 2015. At March 31, 2016 and December 31, 2015, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $281,102 and $319,654, 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 March 31, 2016 and December 31, 2015, revenue bonds account for 52% and 50% of the holdings, respectively. Excluding pre-refunded revenue bonds, the activities supporting the income streams of the Company’s revenue bonds are across a broad range of sectors, primarily highway, water, airport and marina, higher education, specifically pledged tax revenues, and other miscellaneous sources such as bond banks, finance authorities and appropriations.
The Company’s investments in foreign government fixed 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 March 31, 2016, approximately 81%, 7% and 5% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. At December 31, 2015, approximately 79%, 8% and 5% 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 3% of the Company's foreign government securities as of March 31, 2016 and December 31, 2015.
The Company has European investment exposure in its corporate fixed maturity and equity securities of $708,883 with a net unrealized gain of $62,581 at March 31, 2016 and $888,923 with a net unrealized gain of $67,957 at December 31, 2015. Approximately 23% and 25% of the corporate European exposure is held in the financial industry at March 31, 2016 and December 31, 2015, respectively. The Company's largest European country exposure (the United Kingdom) represented approximately 4% and 5% of the fair value of the Company's corporate securities as of March 31, 2016 and December 31, 2015, respectively. Approximately 8% 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. The Company's international investments are managed as part of the overall portfolio with the same approach to risk management and focus on diversification.
The Company has exposure to the energy sector in its corporate fixed maturity securities of $573,013 with a net unrealized gain of $1,365 at March 31, 2016 and $779,720 with a net unrealized loss of $6,985 at December 31, 2015. Approximately 82% and 89% of the energy exposure is rated as investment grade as of March 31, 2016 and December 31, 2015, respectively.
The cost or amortized cost and fair value of fixed maturity securities at March 31, 2016 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Cost or
Amortized
Cost
 
Fair Value
Due in one year or less
$
302,193

 
$
305,652

Due after one year through five years
1,620,861

 
1,694,597

Due after five years through ten years
1,960,202

 
2,047,978

Due after ten years
3,443,285

 
4,024,724

Total
7,326,541

 
8,072,951

Asset-backed
3,026

 
4,011

Commercial mortgage-backed
20,628

 
21,124

Residential mortgage-backed
880,676

 
941,661

Total
$
8,230,871

 
$
9,039,747



13

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following table summarizes the proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses that have been included in earnings as a result of those sales. 
 
Three Months Ended 
 March 31,
 
2016 (a)
 
2015
Proceeds from sales
$
2,267,717

 
$
552,513

Gross realized gains
176,317

 
12,343

Gross realized losses
26,461

 
5,599

(a)
2016 includes $146,727 related to the sale of Assurant Employee Benefits mainly through reinsurance transactions.
The following table sets forth the net realized gains (losses), including OTTI, recognized in the statement of operations as follows: 
 
Three Months Ended 
 March 31,
 
2016 (a)
 
2015
Net realized gains related to sales and other:
 
 
 
Fixed maturity securities
$
139,149

 
$
5,513

Equity securities
9,806

 
874

Commercial mortgage loans on real estate
12,453

 
—

Other investments
958

 
138

Total net realized gains related to sales and other
162,366

 
6,525

Net realized losses related to other-than-temporary
   impairments:
 
 
 
Fixed maturity securities
(648
)
 
(2,570
)
Total net realized losses related to other-than-temporary impairments
(648
)
 
(2,570
)
Total net realized gains
$
161,718

 
$
3,955

(a)
2016 includes $146,727 related to the sale of Assurant Employee Benefits mainly through reinsurance transactions.
Other-Than-Temporary Impairments
The Company follows the OTTI guidance, which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.
For the three months ended March 31, 2016 and 2015, the Company recorded $311 and $3,208, respectively, of OTTI, of which $648 and $2,570, respectively, was related to both credit losses and securities the Company intends to sell and recorded as net OTTI losses recognized in earnings, with the remaining amounts of $337 and $(638), respectively, related to all other factors and was recorded as an unrealized gain (loss) component of AOCI.

14

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following table sets forth the amount of credit loss impairments recognized within the results of operations on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts. 
 
Three Months Ended March 31,
 
2016
 
2015
Balance, January 1,
$
32,377

 
$
35,424

Additions for credit loss impairments recognized in the current period on securities
  previously impaired
554

 
—

Additions for credit loss impairments recognized in the current period on securities not
  previously impaired
—

 
2,570

Reductions for increases in cash flows expected to be collected that are recognized over
  the remaining life of the security
(609
)
 
(472
)
Reductions for credit loss impairments previously recognized on securities which
  matured, paid down, prepaid or were sold during the period
(1,341
)
 
(1,465
)
Balance, March 31,
$
30,981

 
$
36,057

The Company regularly monitors its investment portfolio to ensure investments that may be other-than-temporarily impaired are timely identified, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value.  
The Company considers different factors to determine the amount of projected future cash flows and discounting methods for corporate debt and residential and commercial mortgage-backed or asset-backed securities. For corporate debt securities, the split between the credit and non-credit losses is driven principally by assumptions regarding the amount and timing of projected future cash flows. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the security at the date of acquisition. For residential and commercial mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security prior to impairment at the balance sheet date. The discounted cash flows become the new amortized cost basis of the fixed maturity security.
In periods subsequent to the recognition of an OTTI, the Company generally accretes the discount (or amortizes the reduced premium) into net investment income, up to the non-discounted amount of projected future cash flows, resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the estimated period of cash flows.

15

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at March 31, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
Less than 12 months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government and
  government agencies and authorities
$
19,565

 
$
(5
)
 
$
—

 
$
—

 
$
19,565

 
$
(5
)
Foreign governments
23,005

 
(28
)
 
24,700

 
(437
)
 
47,705

 
(465
)
Asset-backed
—

 
—

 
995

 
(306
)
 
995

 
(306
)
Residential mortgage-backed
63,375

 
(193
)
 
17,348

 
(103
)
 
80,723

 
(296
)
Corporate
664,039

 
(44,440
)
 
103,361

 
(11,963
)
 
767,400

 
(56,403
)
Total fixed maturity securities
$
769,984

 
$
(44,666
)
 
$
146,404

 
$
(12,809
)
 
$
916,388

 
$
(57,475
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
227

 
$
(3
)
 
$
—

 
$
—

 
$
227

 
$
(3
)
Non-redeemable preferred stocks
36,980

 
(810
)
 
12,226

 
(891
)
 
49,206

 
(1,701
)
Total equity securities
$
37,207

 
$
(813
)
 
$
12,226

 
$
(891
)
 
$
49,433

 
$
(1,704
)
 
 
December 31, 2015
 
Less than 12 months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
United States Government and
  government agencies and authorities
$
90,008

 
$
(465
)
 
$
5,564

 
$
(72
)
 
$
95,572

 
$
(537
)
States, municipalities and political
  subdivisions
6,881

 
(94
)
 
—

 
—

 
6,881

 
(94
)
Foreign governments
24,071

 
(347
)
 
22,239

 
(376
)
 
46,310

 
(723
)
Asset-backed
—

 
—

 
1,136

 
(204
)
 
1,136

 
(204
)
Residential mortgage-backed
260,620

 
(3,179
)
 
11,147

 
(230
)
 
271,767

 
(3,409
)
Corporate
1,636,457

 
(85,247
)
 
54,029

 
(10,665
)
 
1,690,486

 
(95,912
)
Total fixed maturity securities
$
2,018,037

 
$
(89,332
)
 
$
94,115

 
$
(11,547
)
 
$
2,112,152

 
$
(100,879
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
623

 
$
(7
)
 
$
—

 
$
—

 
$
623

 
$
(7
)
Non-redeemable preferred stocks
63,665

 
(1,632
)
 
13,806

 
(985
)
 
77,471

 
(2,617
)
Total equity securities
$
64,288

 
$
(1,639
)
 
$
13,806

 
$
(985
)
 
$
78,094

 
$
(2,624
)

16

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




Total gross unrealized losses represent approximately 6% and 5% of the aggregate fair value of the related securities at March 31, 2016 and December 31, 2015, respectively. Approximately 77% and 88% of these gross unrealized losses have been in a continuous loss position for less than twelve months at March 31, 2016 and December 31, 2015, respectively. The total gross unrealized losses are comprised of 380 and 884 individual securities at March 31, 2016 and December 31, 2015, respectively. In accordance with its policy described above, the Company concluded that for these securities an adjustment to its results of operations for other-than-temporary impairments of the gross unrealized losses was not warranted at March 31, 2016 and December 31, 2015. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. As of March 31, 2016, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in the Company’s corporate fixed maturity securities and in non-redeemable preferred stocks. The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, the Company applies an impairment model similar to that used for the Company's fixed maturity securities. As of March 31, 2016, the Company did not intend to sell these securities and it was not more likely than not that the Company would be required to sell them and no underlying cash flow issues were noted. Therefore, the Company did not recognize an OTTI on those perpetual preferred securities that had been in a continuous unrealized loss position for twelve months or more. As of March 31, 2016, the Company did not intend to sell the fixed maturity securities and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of their amortized cost basis. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium.
The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. At March 31, 2016, approximately 42% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Oregon. Although the Company has a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans range in size from $13 to $14,515 at March 31, 2016 and from $17 to $14,625 at December 31, 2015.
Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the third quarter.
 

17

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following summarizes the Company's loan-to-value and average debt-service coverage ratios as of the dates indicated:
 
March 31, 2016
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
836,139

 
95.6
%
 
2.00

71 – 80%
27,961

 
3.2
%
 
1.18

81 – 95%
5,862

 
0.7
%
 
0.92

Greater than 95%
4,816

 
0.5
%
 
3.52

Gross commercial mortgage loans
874,778

 
100
%
 
1.97

Less valuation allowance
(2,582
)
 
 
 
 
Net commercial mortgage loans
$
872,196

 
 
 
 
 
 
December 31, 2015
Loan-to-Value
Carrying
Value
 
% of Gross
Mortgage
Loans
 
Debt-Service
Coverage Ratio
70% and less
$
1,101,572

 
95.5
%
 
2.01

71 – 80%
39,080

 
3.4
%
 
1.19

81 – 95%
8,370

 
0.7
%
 
1.05

Greater than 95%
4,816

 
0.4
%
 
3.52

Gross commercial mortgage loans
1,153,838

 
100
%
 
1.98

Less valuation allowance
(2,582
)
 
 
 
 
Net commercial mortgage loans
$
1,151,256

 
 
 
 
All commercial mortgage loans that are individually impaired have an established mortgage loan valuation allowance for losses. An additional valuation allowance is established for incurred, but not specifically identified impairments. Changing economic conditions affect the Company's valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or decrease in) a commercial mortgage loan valuation allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have exposure to specific geographic events, have deteriorating credits or have experienced a reduction in debt-service coverage ratio. Where warranted, the Company has established or increased a valuation allowance based upon this analysis.

Variable Interest Entities

A VIE is a legal entity which does not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest. The Company's investments in VIEs include private equity limited partnerships and real estate joint ventures. These investments are generally accounted for under the equity method and included in the consolidated balance sheets in other investments. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet in addition to any required unfunded commitments. As of March 31, 2016, the Company's maximum exposure to loss is $224,255 in recorded carrying value and $30,853 in unfunded commitments.


18

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




8. Fair Value Disclosures
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures
The fair value measurements and disclosures guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and takes into account factors specific to the asset or liability.
The levels of the fair value hierarchy are described below:
•
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. The observable inputs are used in valuation models to calculate the fair value for the asset.
•
Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
 

19

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015. The amounts presented below for Other investments, Cash equivalents, Other assets, Assets and Liabilities held in separate accounts and Other liabilities differ from the amounts presented in the consolidated balance sheets because only certain investments or certain assets and liabilities within these line items are measured at estimated fair value. Other investments are comprised of investments in the Assurant Investment Plan, American Security Insurance Company Investment Plan, Assurant Deferred Compensation Plan, modified coinsurance arrangements and other derivatives. Other liabilities are comprised of investments in the Assurant Investment Plan and other derivatives. The fair value amount and the majority of the associated levels presented for Other investments and Assets and Liabilities held in separate accounts are received directly from third parties. 
 
March 31, 2016
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
United States Government and government agencies
  and authorities
$
177,982

 
$
—

  
 
$
177,982

  
 
$
—

  
State, municipalities and political subdivisions
608,919

 
—

  
 
608,919

  
 
—

  
Foreign governments
575,343

 
842

  
 
574,501

  
 
—

  
Asset-backed
4,011

 
—

  
 
4,011

  
 
—

  
Commercial mortgage-backed
21,124

 
—

  
 
20,970

  
 
154

  
Residential mortgage-backed
941,661

 
—

  
 
941,661

  
 
—

  
Corporate
6,710,707

 
—

  
 
6,644,815

  
 
65,892

  
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
19,173

 
18,490

  
 
683

  
 
—

  
Non-redeemable preferred stocks
384,529

 
—

  
 
382,169

  
 
2,360

  
Short-term investments
449,691

 
354,391

b 
 
95,300

c 
 
—

  
Other investments
283,059

 
65,490

a 
 
216,017

c 
 
1,552

d 
Cash equivalents
1,564,470

 
1,542,075

b 
 
22,395

c 
 
—

  
Other assets
1,838

 
—

  
 
1,477

e
 
361

e 
Assets held in separate accounts
1,672,325

 
1,510,461

a 
 
161,864

c 
 
—

  
Total financial assets
$
13,414,832

 
$
3,491,749

  
 
$
9,852,764

  
 
$
70,319

  
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
93,114

 
$
65,490

a 
 
$
32

e
 
$
27,592

e
Liabilities related to separate accounts
1,672,325

 
1,510,461

a 
 
161,864

c 
 
—

   
Total financial liabilities
$
1,765,439

 
$
1,575,951

  
 
$
161,896

   
 
$
27,592

   

 
 

20

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




 
December 31, 2015
 
 
Total
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
United States Government and government agencies
  and authorities
$
154,035

 
$
—

 
 
$
154,035

 
 
$
—

 
State, municipalities and political subdivisions
695,630

 
—

 
 
695,630

 
 
—

 
Foreign governments
562,250

 
944

 
 
561,306

 
 
—

 
Asset-backed
4,662

 
—

 
 
4,662

 
 
—

 
Commercial mortgage-backed
22,521

 
—

 
 
22,317

 
 
204

 
Residential mortgage-backed
998,514

 
—

 
 
998,514

 
 
—

 
Corporate
7,777,716

 
—

 
 
7,714,570

 
 
63,146

 
Equity securities:
 
 
 
 
 
 
 
 
 
 
Common stocks
19,664

 
18,981

 
 
683

 
 
—

 
Non-redeemable preferred stocks
480,393

 
—

 
 
478,143

 
 
2,250

 
Short-term investments
508,950

 
453,335

b 
 
55,615

c 
 
—

 
Other investments
253,708

 
62,076

a 
 
189,407

c 
 
2,225

d 
Cash equivalents
908,936

 
907,248

b 
 
1,688

c 
 
—

 
Other assets
1,320

 
—

  
 
886

e
 
434

e 
Assets held in separate accounts
1,750,556

 
1,570,000

a 
 
180,556

c 
 
—

 
Total financial assets
$
14,138,855

 
$
3,012,584

 
 
$
11,058,012

 
 
$
68,259

 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
89,765

 
$
62,076

a 
 
$
6

e
 
$
27,683

e
Liabilities related to separate accounts
1,750,556

 
1,570,000

a 
 
180,556

c 
 
—

 
Total financial liabilities
$
1,840,321

 
$
1,632,076

 
 
$
180,562

 
 
$
27,683

 
 

a.
Mainly includes mutual funds.
b.
Mainly includes money market funds.
c.
Mainly includes fixed maturity securities.
d.
Mainly includes fixed maturity securities and other derivatives.
e.
Mainly includes other derivatives.


There were no transfers between Level 1 and Level 2 financial assets during either period. However, there were transfers between Level 2 and Level 3 financial assets during the periods, which are reflected in the “Transfers in” and “Transfers out” columns below. Transfers between Level 2 and Level 3 most commonly occur from changes in the availability of observable market information and re-evaluation of the observability of pricing inputs. Any remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources.

21

Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2016 and 2015
(In thousands, except number of shares and per share amounts)
 
 
 




The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets and liabilities carried at fair value during the three months ended March 31, 2016 and 2015: 
 
 

  
 
Three Months Ended March 31, 2016
 
Balance,
beginning of
period
 
Total
gains (losses)
(realized/
unrealized)
included in
earnings (1)
 
Net unrealized
(losses) gains
included in
other
comprehensive
income (2)
 
Purchases
 
Sales
 
Transfers
out (3)
 
Balance,
end of
period
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
204

 
$
—

 
$
(1
)
 
$
—

 
$
(49
)
 
$
—

 
$
154

Corporate
63,146

 
145

 
51

 
8,100

 
(719
)
 
(4,831
)
 
65,892

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
2,250

 
—

 
110

 
—

 
—

 
—

 
2,360

Other investments
2,225

 
(636
)
 
(11
)
 
—

 
(26
)
 
—

 
1,552

Other assets
434

 
(73
)
 
—

 
—

 
—

 
—

 
361

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
(27,683
)
 
91

 
—

 
—

 
—

 
—

 
(27,592
)
Total level 3 assets and liabilities
$
40,576

 
$
(473
)
 
$
149

 
$
8,100

 
$
(794
)
 
$
(4,831
)
 
$
42,727



 
Three Months Ended March 31, 2015
 
Balance,
beginning of
period
 
Total
(losses)
gains
(realized/
unrealized)
included in
earnings (1)
 
Net unrealized
(losses) gains
included in
other
comprehensive
income (2)
 
Sales
 
Transfers
in (3)
 
Transfers
out (3)
 
Balance,
end of
period
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
403

 
$
—

 
$
(3
)
 
$
(46
)
 
$
—

 
$
—

 
$
354

Residential mortgage-backed
4,645

 
—

 
—

 
—

 
—

 
(4,645
)
 
—

Corporate
104,275

 
(8
)
 
880

 
(2,155
)
 
2,130

 
(4,132
)
 
100,990

Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
2,000

 
—

 
60

 
—

 
—

 
—

 
2,060

Other investments
2,121

 
128

 
(4
)
 
(21
)
 
236

 
—

 
2,460

Other assets
807

 
137

 
—

 
—

 
—

 
—

 
944

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
(25,233
)
 
(948
)
 
—

 
—

 
—

 
—

 
(26,181
)
Total level 3 assets and liabilities
$
89,018

 
$
(691
)
 
$
933

 
$