Edgar Filing: ASSURANT INC

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

¨	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.)

One Chase Manhattan Plaza, 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 þ 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 þ 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	þ	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 þ

The number of shares of the registrant’s Common Stock outstanding at October 24, 2012 was 78,708,346.

ASSURANT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS


Item Number		Page Number

PART I FINANCIAL INFORMATION

1.	Financial Statements of Assurant, Inc.:

	Consolidated Balance Sheets (unaudited) at September 30, 2012 and December 31, 2011		2

	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2012 and 2011		4

	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2012 and 2011		5

	Consolidated Statement of Changes in Stockholders’ Equity (unaudited) from December 31, 2011 through September 30, 2012		6

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011		7

	Notes to Consolidated Financial Statements (unaudited) for the nine months ended September 30, 2012 and 2011		8

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44

3.	Quantitative and Qualitative Disclosures About Market Risk		66

4.	Controls and Procedures		66

PART II OTHER INFORMATION

1.	Legal Proceedings		67

1A.	Risk Factors		67

2.	Unregistered Sales of Equity Securities and Use of Proceeds		69

6.	Exhibits		70

	Signatures		71

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.

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2012 and December 31, 2011


	September 30, 2012		December 31, 2011
	(in thousands except number of shares and per share amounts)
Assets
Investments:
Fixed maturity securities available for sale, at fair value (amortized cost—$10,577,963 in 2012 and $10,123,429 in 2011)	$	12,043,931	$	11,192,599
Equity securities available for sale, at fair value (cost—$395,822 in 2012 and $357,411 in 2011)		440,515		362,376
Commercial mortgage loans on real estate, at amortized cost		1,302,373		1,309,687
Policy loans		53,924		54,192
Short-term investments		251,495		441,383
Collateral held/pledged under securities agreements		94,043		95,221
Other investments		578,148		570,707

Total investments		14,764,429		14,026,165

Cash and cash equivalents		1,072,506		1,166,713
Premiums and accounts receivable, net		760,676		649,122
Reinsurance recoverables		5,490,610		5,411,064
Accrued investment income		162,465		153,783
Deferred acquisition costs		2,760,365		2,492,857
Property and equipment, at cost less accumulated depreciation		246,969		242,908
Deferred income taxes, net		0		44,280
Tax receivable		49,128		0
Goodwill		640,934		639,097
Value of business acquired		64,352		71,014
Other intangible assets, net		269,953		303,832
Other assets		121,418		124,298
Assets held in separate accounts		1,765,818		1,694,729

Total assets	$	28,169,623	$	27,019,862

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2012 and December 31, 2011


	September 30, 2012			December 31, 2011
	(in thousands except number of shares and per share amounts)
Liabilities
Future policy benefits and expenses	$	8,481,404		$	8,359,206
Unearned premiums		5,896,673			5,482,017
Claims and benefits payable		3,360,743			3,437,119
Commissions payable		282,199			260,022
Reinsurance balances payable		113,701			130,144
Funds held under reinsurance		60,703			64,413
Deferred gain on disposal of businesses		120,215			134,033
Obligation under securities agreements		94,024			95,494
Accounts payable and other liabilities		1,608,605			1,486,026
Deferred income taxes, net		183,557			0
Tax payable		0			30,431
Debt		972,368			972,278
Liabilities related to separate accounts		1,765,818			1,694,729

Total liabilities		22,940,010			22,145,912

Commitments and contingencies (Note 14)

Stockholders’ equity
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 79,456,860 and 88,524,374 shares outstanding at September 30, 2012 and December 31, 2011, respectively		1,473			1,464
Additional paid-in capital		3,043,121			3,025,477
Retained earnings		3,992,869			3,586,784
Accumulated other comprehensive income		858,859			557,576
Treasury stock, at cost; 67,480,638 and 57,433,178 shares at September 30, 2012 and December 31, 2011, respectively		(2,666,709	)		(2,297,351	)

Total stockholders’ equity		5,229,613			4,873,950

Total liabilities and stockholders’ equity	$	28,169,623		$	27,019,862

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended September 30, 2012 and 2011


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
	(in thousands except number of shares and per share amounts)
Revenues
Net earned premiums and other considerations	$	1,838,481	$	1,777,315		$	5,407,778		$	5,307,635
Net investment income		169,433		172,176			541,042			517,893
Net realized gains on investments, excluding other-than-temporary impairment losses		8,460		5,079			36,018			27,937
Total other-than-temporary impairment losses		0		(4,703	)		(1,936	)		(7,849	)
Portion of net gain recognized in other comprehensive income, before taxes		0		156			97			267

Net other-than-temporary impairment losses recognized in earnings		0		(4,547	)		(1,839	)		(7,582	)
Amortization of deferred gain on disposal of businesses		4,600		5,114			13,817			15,353
Fees and other income		124,106		106,578			350,478			300,037

Total revenues		2,145,080		2,061,715			6,347,294			6,161,273


Benefits, losses and expenses
Policyholder benefits		895,480		997,431			2,623,865			2,877,303
Amortization of deferred acquisition costs and value of business acquired		363,996		340,673			1,040,616			997,812
Underwriting, general and administrative expenses		661,907		596,110			1,914,657			1,783,383
Interest expense		15,078		15,078			45,228			45,284

Total benefits, losses and expenses		1,936,461		1,949,292			5,624,366			5,703,782

Income before provision for income taxes		208,619		112,423			722,928			457,491
Provision for income taxes		82,331		38,386			264,210			77,687

Net income	$	126,288	$	74,037		$	458,718		$	379,804


Earnings Per Share
Basic	$	1.54	$	0.78		$	5.35		$	3.87
Diluted	$	1.52	$	0.77		$	5.30		$	3.84
Dividends per share	$	0.21	$	0.18		$	0.60		$	0.52

Share Data
Weighted average shares outstanding used in basic per share calculations		82,156,838		95,351,601			85,723,387			98,065,082
Plus: Dilutive securities		802,615		951,411			875,321			895,630

Weighted average shares used in diluted per share calculations		82,959,453		96,303,012			86,598,708			98,960,712

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

Three and Nine Months Ended September 30, 2012 and 2011


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
	(in thousands)

Net income	$	126,288	$	74,037		$	458,718	$	379,804


Other comprehensive income:

Change in unrealized gains on securities, net of taxes of $(82,741), $(88,903), $(146,659) and $(124,660), respectively		160,592		177,985			280,710		244,370
Change in other-than-temporary impairment gains recognized in other comprehensive income, net of taxes of $(1,229), $1,471, $(3,307) and $(1,981), respectively		2,283		(2,732	)		6,142		3,679

Changes in foreign currency translation, net of taxes of $(4,657), $6,415, $(4,436) and $3,348, respectively		15,712		(32,296	)		3,116		(15,625	)
Amortization of pension and postretirement unrecognized net periodic benefit cost and change in funded status, net of taxes of $(2,068), $(1,225), $(6,093) and $(4,347), respectively		3,840		2,274			11,315		8,052


Total other comprehensive income		182,427		145,231			301,283		240,476


Total comprehensive income	$	308,715	$	219,268		$	760,001	$	620,280

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Consolidated Statement of Stockholders’ Equity (unaudited)

From December 31, 2011 through September 30, 2012


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total
	(in thousands)
Balance, December 31, 2011, as previously reported	$	1,464	$	3,025,477		$	3,742,479		$	554,867	$	(2,297,351	)	$	5,026,936
Cumulative effect of adjustment resulting from new accounting guidance		0		0			(155,695	)		2,709		0			(152,986	)


Adjusted balance, December 31, 2011		1,464		3,025,477			3,586,784			557,576		(2,297,351	)		4,873,950
Stock plan exercises		9		(10,590	)		0			0		0			(10,581	)
Stock plan compensation expense		0		25,770			0			0		0			25,770
Change in tax benefit from share-based payment arrangements		0		2,464			0			0		0			2,464
Dividends		0		0			(52,633	)		0		0			(52,633	)
Acquisition of common stock		0		0			0			0		(369,358	)		(369,358	)
Net income		0		0			458,718			0		0			458,718
Total other comprehensive income		0		0			0			301,283		0			301,283

Balance, September 30, 2012	$	1,473	$	3,043,121		$	3,992,869		$	858,859	$	(2,666,709	)	$	5,229,613

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Consolidated Statement of Cash Flows (unaudited)

Nine Months Ended September 30, 2012 and 2011


	Nine Months Ended September 30,
	2012			2011
	(in thousands)
Net cash provided by operating activities	$	429,159		$	509,691

Investing activities
Sales of:
Fixed maturity securities available for sale		1,485,221			1,183,324
Equity securities available for sale		92,052			71,798
Other invested assets		66,359			24,293
Property and equipment and other		2,453			2,565
Maturities, prepayments, and scheduled redemption of:
Fixed maturity securities available for sale		784,708			749,210
Commercial mortgage loans on real estate		89,096			79,093
Purchases of:
Fixed maturity securities available for sale		(2,529,934	)		(1,908,896	)
Equity securities available for sale		(130,171	)		(33,326	)
Commercial mortgage loans on real estate		(82,575	)		(66,502	)
Other invested assets		(24,076	)		(49,193	)
Property and equipment and other		(40,042	)		(25,153	)
Subsidiary, net of cash transferred		(3,500	)		(45,080	)
Change in short-term investments		190,257			(155,564	)
Change in policy loans		391			1,489
Change in collateral held/pledged under securities agreements		1,470			26,483

Net cash used in investing activities		(98,291	)		(145,459	)

Financing activities
Repayment of mandatorily redeemable preferred stock		0			(5,000	)
Change in tax benefit from share-based payment arrangements		2,464			(2,963	)
Acquisition of common stock		(370,469	)		(364,943	)
Dividends paid		(52,633	)		(50,858	)
Change in obligation under securities agreements		(1,470	)		(26,482	)
Change in receivables under securities loan agreements		0			14,370
Change in obligations to return borrowed securities		0			(14,281	)

Net cash used in financing activities		(422,108	)		(450,157	)

Effect of exchange rate changes on cash and cash equivalents		(2,967	)		(5,068	)

Change in cash and cash equivalents		(94,207	)		(90,993	)
Cash and cash equivalents at beginning of period		1,166,713			1,150,516

Cash and cash equivalents at end of period	$	1,072,506		$	1,059,523

See the accompanying notes to the consolidated financial statements

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

1. Nature of Operations

Assurant, Inc. (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and select worldwide markets.

The Company is traded on the New York Stock Exchange under the symbol AIZ.

Through its operating subsidiaries, the Company provides debt protection administration, credit-related insurance, warranties and service contracts, pre-funded funeral insurance, lender-placed homeowners insurance, manufactured housing homeowners insurance, individual health and small employer group health insurance, group dental insurance, group disability insurance, and group life insurance.

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.

On January 1, 2012, the Company adopted the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements.

The interim financial data as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to 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. Certain prior period amounts have been reclassified to conform to the 2012 presentation.

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”) was signed into law in March 2010. One provision of the Affordable Care Act, effective January 1, 2011, established a minimum medical loss ratio (“MLR”) designed to ensure that a minimum level of benefits are paid to health insurance policyholders. The Affordable Care Act established an MLR of 80% for individual and small group business and 85% for large group business. If the actual loss ratios, calculated in a manner prescribed by the Department of Health and Human Services (“HHS”), are less than the required MLR, rebates are payable to the policyholders by August 1 of the subsequent year.

Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

3. Recent Accounting Pronouncements

Recent Accounting Pronouncements—Adopted

On September 30, 2012, the Company adopted the amended intangibles-goodwill and other guidance. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. Under this amended guidance, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset, unless the entity determines, based on qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment and did not have an impact on the Company’s financial position or results of operations.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

On January 1, 2012, the Company adopted the guidance on fair value measurement. This amended guidance changes certain fair value measurement principles and expands required disclosures to include quantitative and qualitative information about unobservable inputs in Level 3 measurements to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. The adoption of this guidance did not have an impact on the Company’s financial position or results of operations.

On January 1, 2012, the Company adopted the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. The amendments modified the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. Under this amended guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. As of January 1, 2011, the beginning of the earliest period presented, the cumulative effect adjustment recorded to reflect this guidance resulted in a decrease of $148,811 in retained earnings, an increase of $1,411 in accumulated other comprehensive income and a decrease of $147,400 in total stockholders’ equity.

The effect of adoption of this new guidance on the December 31, 2011 consolidated balance sheet was as follows:


	As Previously Reported		Effect of Change			As Currently Reported

Deferred acquisition costs	$	2,632,720	$	(139,863	)	$	2,492,857
Deferred income taxes, net		0		44,280			44,280
Total assets		27,115,445		(95,583	)		27,019,862
Future policy benefits and expenses		8,269,343		89,863			8,359,206
Deferred income taxes, net		32,460		(32,460	)		0
Total liabilities		22,088,509		57,403			22,145,912
Retained earnings		3,742,479		(155,695	)		3,586,784
Accumulated other comprehensive income		554,867		2,709			557,576
Total stockholders’ equity		5,026,936		(152,986	)		4,873,950
Total liabilities and stockholders’ equity		27,115,445		(95,583	)		27,019,862

The effect of adoption of this new guidance on the consolidated statement of operations for the three months ended September 30, 2011 was as follows:


	As Previously Reported		Effect of Change			As Currently Reported

Policyholder benefits	$	998,875	$	(1,444	)	$	997,431
Amortization of deferred acquisition costs and value of business acquired		370,107		(29,434	)		340,673
Underwriting, general and administrative expenses		562,346		33,764			596,110
Total benefits, losses and expenses		1,946,406		2,886			1,949,292
Income before provision for income taxes		115,309		(2,886	)		112,423
Provision for income taxes		39,326		(940	)		38,386
Net income		75,983		(1,946	)		74,037

Earnings per share
Basic		0.80		(0.02	)		0.78
Diluted		0.79		(0.02	)		0.77

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The effect of adoption of this new guidance on the consolidated statement of operations for the nine months ended September 30, 2011 was as follows:


	As Previously Reported		Effect of Change			As Currently Reported

Policyholder benefits	$	2,881,582	$	(4,279	)	$	2,877,303
Amortization of deferred acquisition costs and value of business acquired		1,086,720		(88,908	)		997,812
Underwriting, general and administrative expenses		1,685,821		97,562			1,783,383
Total benefits, losses and expenses		5,699,407		4,375			5,703,782
Income before provision for income taxes		461,866		(4,375	)		457,491
Provision for income taxes		78,282		(595	)		77,687
Net income		383,584		(3,780	)		379,804

Earnings per share
Basic		3.91		(0.04	)		3.87
Diluted		3.88		(0.04	)		3.84

Recent Accounting Pronouncements—Not Yet Adopted

In July 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to the other expenses guidance to address how health insurers should recognize and classify in their income statements fees mandated by the Affordable Care Act. The Affordable Care Act imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The amendments specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense ratably over the calendar year during which it is payable. The guidance is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. Therefore, the Company is required to adopt this guidance on January 1, 2014. The Company is currently evaluating the requirements of the amendments and the potential impact on the Company’s financial position and results of operations.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

4. Investments

The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) of our fixed maturity and equity securities as of the dates indicated:


	September 30, 2012
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI in AOCI
Fixed maturity securities:
United States Government and government agencies and authorities	$	589,408	$	9,402	$	(149	)	$	598,661	$	0
States, municipalities and political subdivisions		804,345		111,817		(103	)		916,059		0
Foreign governments		673,560		87,152		(1,306	)		759,406		0
Asset-backed		27,614		1,642		(578	)		28,678		1,166
Commercial mortgage-backed		70,293		5,859		0			76,152		0
Residential mortgage-backed		721,897		60,304		(82	)		782,119		12,477
Corporate		7,690,846		1,201,666		(9,656	)		8,882,856		19,477

Total fixed maturity securities	$	10,577,963	$	1,477,842	$	(11,874	)	$	12,043,931	$	33,120

Equity securities:
Common stocks	$	14,037	$	4,079	$	0		$	18,116	$	0
Non-redeemable preferred stocks		381,785		47,442		(6,828	)		422,399		0

Total equity securities	$	395,822	$	51,521	$	(6,828	)	$	440,515	$	0


	December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI in AOCI
Fixed maturity securities:
United States Government and government agencies and authorities	$	148,379	$	8,987	$	(26	)	$	157,340	$	0
States, municipalities and political subdivisions		832,788		96,536		(301	)		929,023		0
Foreign governments		647,133		78,148		(1,368	)		723,913		0
Asset-backed		30,681		2,072		(320	)		32,433		1,118
Commercial mortgage-backed		82,184		5,840		0			88,024		0
Residential mortgage-backed		841,488		56,364		(633	)		897,219		8,240
Corporate		7,540,776		882,628		(58,757	)		8,364,647		14,313

Total fixed maturity securities	$	10,123,429	$	1,130,575	$	(61,405	)	$	11,192,599	$	23,671

Equity securities:
Common stocks	$	14,037	$	2,018	$	(54	)	$	16,001	$	0
Non-redeemable preferred stocks		343,374		28,141		(25,140	)		346,375		0

Total equity securities	$	357,411	$	30,159	$	(25,194	)	$	362,376	$	0

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Our states, municipalities and political subdivisions holdings are highly diversified across the United States 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 September 30, 2012 and December 31, 2011. At September 30, 2012 and December 31, 2011, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $166,530 and $164,347, 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 September 30, 2012 and December 31, 2011, revenue bonds account for 52% and 51% of the holdings, respectively. Excluding pre-refunded bonds, sales tax, highway, water, fuel sales, transit and miscellaneous (which includes bond banks, finance authorities and appropriations) provide for 82% and 80% of the revenue sources, as of September 30, 2012 and December 31, 2011, respectively.

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 September 30, 2012 and December 31, 2011, approximately 66%, 15%, 6% and 63%, 13%, 7% 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% and 5% of our foreign government securities as of September 30, 2012 and December 31, 2011, respectively.

The Company has European investment exposure in its corporate fixed maturity and equity securities of $984,651 with an unrealized gain of $111,569 at September 30, 2012 and $868,012 with an unrealized gain of $61,387 at December 31, 2011. Approximately 28% and 31% of the corporate European exposure is held in the financial industry at September 30, 2012 and December 31, 2011, respectively. No European country represented more than 5% of the fair value of our corporate securities as of September 30, 2012 and December 31, 2011. Approximately 5% 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. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification.

The cost or amortized cost and fair value of fixed maturity securities at September 30, 2012 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	$	449,538	$	459,149
Due after one year through five years		2,515,039		2,678,968
Due after five years through ten years		2,531,318		2,805,126
Due after ten years		4,262,264		5,213,739

Total		9,758,159		11,156,982
Asset-backed		27,614		28,678
Commercial mortgage-backed		70,293		76,152
Residential mortgage-backed		721,897		782,119

Total	$	10,577,963	$	12,043,931

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Proceeds from sales	$	628,257	$	332,490	$	1,595,172	$	1,280,982
Gross realized gains		11,017		14,018		45,813		42,453
Gross realized losses		2,396		5,705		10,642		15,012

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The following table sets forth the net realized gains (losses), including OTTI, recognized in the statements of operations as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net realized gains (losses) related to sales and other:
Fixed maturity securities	$	9,306		$	13,036		$	38,511		$	33,941
Equity securities		(856	)		(4,719	)		(3,165	)		(4,808	)
Mortgage loans		0			0			(256	)		0
Other investments		10			(3,238	)		928			(1,196	)

Total net realized gains related to sales and other		8,460			5,079			36,018			27,937

Net realized losses related to other-than-temporary impairments:
Fixed maturity securities		0			(4,547	)		(1,283	)		(7,561	)
Equity securities		0			0			(226	)		(21	)
Other investments		0			0			(330	)		0

Total net realized losses related to other-than-temporary impairments		0			(4,547	)		(1,839	)		(7,582	)

Total net realized gains	$	8,460		$	532		$	34,179		$	20,355

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 nine months ended September 30, 2012, the Company recorded $1,936, of OTTI, of which $1,839 was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $97 related to all other factors and recorded as an unrealized loss component of AOCI. For the three months ended September 30, 2012, the Company did not incur any OTTI. For the three and nine months ended September 30, 2011, the Company recorded $4,703 and $7,848, respectively, of OTTI, of which $4,547 and $7,582, respectively, was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $156 and $266, respectively, related to all other factors and recorded as an unrealized loss component of AOCI.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The following tables set 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 September 30,
	2012			2011

Balance, June 30,	$	98,588		$	105,634
Additions for credit loss impairments recognized in the current period on securities previously impaired		0			9
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security		(187	)		(202	)
Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(816	)		(1,895	)

Balance, September 30,	$	97,585		$	103,546


	Nine Months Ended September 30,
	2012			2011

Balance, January 1,	$	103,090		$	105,245
Additions for credit loss impairments recognized in the current period on securities not previously impaired		0			1,455
Additions for credit loss impairments recognized in the current period on securities previously impaired		56			1,567
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security		(1,001	)		(470	)
Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(4,560	)		(4,251	)

Balance, September 30,	$	97,585		$	103,546

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, 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

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

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.

The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2012 and December 31, 2011 were as follows:


	September 30, 2012
	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	$	367,324	$	(149	)	$	0	$	0		$	367,324	$	(149	)
States, municipalities and political subdivisions		0		0			4,564		(103	)		4,564		(103	)
Foreign governments		22,939		(26	)		8,800		(1,280	)		31,739		(1,306	)
Asset-backed		0		0			2,517		(578	)		2,517		(578	)
Residential mortgage-backed		15,811		(64	)		2,103		(18	)		17,914		(82	)
Corporate		180,419		(2,920	)		120,419		(6,736	)		300,838		(9,656	)

Total fixed maturity securities	$	586,493	$	(3,159	)	$	138,403	$	(8,715	)	$	724,896	$	(11,874	)

Equity securities:
Non-redeemable preferred stocks	$	23,794	$	(334	)	$	57,091	$	(6,494	)	$	80,885	$	(6,828	)

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	December 31, 2011
	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	$	8,852	$	(26	)	$	0	$	0		$	8,852	$	(26	)
States, municipalities and political subdivisions		0		0			5,503		(301	)		5,503		(301	)
Foreign governments		31,125		(150	)		9,443		(1,218	)		40,568		(1,368	)
Asset-backed		2,624		(320	)		0		0			2,624		(320	)
Residential mortgage-backed		43,141		(513	)		2,368		(120	)		45,509		(633	)
Corporate		718,815		(32,899	)		176,279		(25,858	)		895,094		(58,757	)

Total fixed maturity securities	$	804,557	$	(33,908	)	$	193,593	$	(27,497	)	$	998,150	$	(61,405	)

Equity securities:
Common stocks	$	1,174	$	(54	)	$	0	$	0		$	1,174	$	(54	)
Non-redeemable preferred stocks		51,577		(4,499	)		85,704		(20,641	)		137,281		(25,140	)

Total equity securities	$	52,751	$	(4,553	)	$	85,704	$	(20,641	)	$	138,455	$	(25,194	)

Total gross unrealized losses represent less than 3% and 8% of the aggregate fair value of the related securities at September 30, 2012 and December 31, 2011, respectively. Approximately 19% and 44% of these gross unrealized losses have been in a continuous loss position for less than twelve months at September 30, 2012 and December 31, 2011, respectively. The total gross unrealized losses are comprised of 167 and 389 individual securities at September 30, 2012 and December 31, 2011, 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 September 30, 2012 and December 31, 2011. These conclusions are based on a detailed analysis of the underlying credit and expected cash flows of each security. As of September 30, 2012, 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. Within the Company’s corporate fixed maturity securities, the majority of the loss position relates to securities in the financial industry sector. For these concentrations, gross unrealized losses of twelve months or more were $3,502, or 52%, of the total. The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, we apply an impairment model similar to that used for our fixed maturity securities. As of September 30, 2012, 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, we 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 September 30, 2012, 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 made commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. At September 30, 2012, approximately 39% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Utah. 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 $20 to $16,027 at September 30, 2012 and from $36 to $16,285 at December 31, 2011.

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.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The following summarizes our loan-to value and average debt-service coverage ratios as of the dates indicated:


	September 30, 2012
Loan-to-Value	Carrying Value			% of Gross Mortgage Loans			Debt-Service Coverage Ratio
70% and less	$	1,116,418			85.0	%		1.93
71 – 80%		121,930			9.3	%		1.31
81 – 95%		57,711			4.4	%		1.19
Greater than 95%		16,639			1.3	%		1.02

Gross commercial mortgage loans		1,312,698			100.0	%		1.83

Less valuation allowance		(10,325	)

Net commercial mortgage loans	$	1,302,373


	December 31, 2011
Loan-to-Value	Carrying Value			% of Gross Mortgage Loans			Debt-Service Coverage Ratio
70% and less	$	1,018,927			77.1	%		2.09
71 – 80%		188,816			14.3	%		1.37
81 – 95%		74,657			5.7	%		1.16
Greater than 95%		37,697			2.9	%		0.76

Gross commercial mortgage loans		1,320,097			100.0	%		1.90

Less valuation allowance		(10,410	)

Net commercial mortgage loans	$	1,309,687

All commercial mortgage loans that are individually impaired have an established mortgage loan valuation allowance for losses. Changing economic conditions affect our valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that we perform 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, we continue to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have exposure to earthquakes, have deteriorating credits or have experienced a reduction in debt-service coverage ratio. Where warranted, we have established or increased a valuation allowance based upon this analysis.

Collateralized Transactions

The Company engages in transactions in which fixed maturity securities, especially 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 benefit 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 September 30, 2012 and December 31, 2011, our collateral held under securities lending, of which its use is unrestricted, was $94,043 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 $94,024 and $95,494, 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 or loss and is included as part of AOCI. All securities are in an unrealized gain position as of September 30, 2012. All securities with unrealized losses as of December 31, 2011 had been in a continuous loss position for twelve months or longer. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

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 flows from financing 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 flows from investing activities.

5. 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 considers 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.

A review of fair value hierarchy classifications is conducted 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.

The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011. The amounts presented below for Collateral held/pledged under securities agreements, 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, a modified coinsurance arrangement 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 held in separate accounts are received directly from third parties.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	September 30, 2012
Financial Assets	Total		Level 1			Level 2			Level 3
Fixed maturity securities:
United States Government and government agencies and authorities	$	598,661	$	0		$	594,482		$	4,179
State, municipalities and political subdivisions		916,059		0			916,059			0
Foreign governments		759,406		778			734,769			23,859
Asset-backed		28,678		0			28,678			0
Commercial mortgage-backed		76,152		0			73,603			2,549
Residential mortgage-backed		782,119		0			773,609			8,510
Corporate		8,882,856		0			8,728,045			154,811
Equity securities:
Common stocks		18,116		17,433			683			0
Non-redeemable preferred stocks		422,399		0			422,398			1
Short-term investments		251,495		138,655	b		112,840	c		0
Collateral held/pledged under securities agreements		69,043		64,911	b		4,132	c		0
Other investments		252,136		50,504	a		191,115	c		10,517	d
Cash equivalents		681,504		681,414	b		90	c		0
Other assets		7,430		0			1,123	f		6,307	e
Assets held in separate accounts		1,708,351		1,494,800	a		213,551	c		0

Total financial assets	$	15,454,405	$	2,448,495		$	12,795,177		$	210,733


Financial Liabilities
Other liabilities	$	52,765	$	50,504	a	$	171	f	$	2,090	f
Liabilities related to separate accounts		1,708,351		1,494,800	a		213,551	c		0

Total financial liabilities	$	1,761,116	$	1,545,304		$	213,722		$	2,090

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	December 31, 2011
Financial Assets	Total		Level 1			Level 2			Level 3
Fixed maturity securities:
United States Government and government agencies and authorities	$	157,340	$	0		$	152,940		$	4,400
State, municipalities and political subdivisions		929,023		0			929,023			0
Foreign governments		723,913		1,857			699,343			22,713
Asset-backed		32,433		0			31,980			453
Commercial mortgage-backed		88,024		0			87,120			904
Residential mortgage-backed		897,219		0			895,352			1,867
Corporate		8,364,647		0			8,227,018			137,629
Equity securities:
Common stocks		16,001		15,318			683			0
Non-redeemable preferred stocks		346,375		0			346,362			13
Short-term investments		441,383		355,732	b		85,651	c		0
Collateral held/pledged under securities agreements		70,221		56,441	b		13,780	c		0
Other investments		245,280		47,931	a		179,092	c		18,257	d
Cash equivalents		915,339		887,135	b		28,204	c		0
Other assets		9,241		0			720	f		8,521	e
Assets held in separate accounts		1,632,781		1,417,864	a		214,917	c		0

Total financial assets	$	14,869,220	$	2,782,278		$	11,892,185		$	194,757


Financial Liabilities
Other liabilities	$	50,754	$	47,931	a	$	103	f	$	2,720	f
Liabilities related to separate accounts		1,632,781		1,417,864	a		214,917	c		0

Total financial liabilities	$	1,683,535	$	1,465,795		$	215,020		$	2,720

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 the Consumer Price Index Cap Derivatives (“CPI Caps”).

f.	Mainly includes other derivatives.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

There were no transfers between Level 1 and Level 2 financial assets during the period. However, there were transfers between Level 2 and Level 3 financial assets during the period, which are reflected in the “Transfers in” and “Transfers out” columns below. Transfers between Level 2 and Level 3 most commonly occur when market observable inputs that were previously available become unavailable in the current period. The remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources.

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 and nine months ended September 30, 2012 and 2011:


	Three Months Ended September 30, 2012
	Balance, beginning of period			Total gains (losses) (realized/ unrealized) included in earnings			Net unrealized gains (losses) included in stockholders’ equity			Sales			Transfers in (1)		Transfers out (1)			Balance, end of period
Fixed Maturity Securities
United States Government and government agencies and authorities	$	4,289		$	0		$	(1	)	$	(109	)	$	0	$	0		$	4,179
Foreign governments		23,367			83			1,091			(682	)		0		0			23,859
Commercial mortgage-backed		823			34			(30	)		(1,172	)		2,894		0			2,549
Residential mortgage-backed		8,535			(5	)		191			(211	)		0		0			8,510
Corporate		141,877			(104	)		5,124			(1,801	)		9,715		0			154,811
Equity Securities
Non-redeemable preferred stocks		1			0			0			0			0		0			1
Other investments		10,999			220			173			(248	)		0		(627	)		10,517
Other assets		6,274			33			0			0			0		0			6,307
Financial Liabilities
Other liabilities		(1,935	)		(155	)		0			0			0		0			(2,090	)

Total level 3 assets and liabilities	$	194,230		$	106		$	6,548		$	(4,223	)	$	12,609	$	(627	)	$	208,643

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	Three Months Ended September 30, 2011
	Balance, beginning of period		Total gains (losses) (realized/ unrealized) included in earnings			Net unrealized gains (losses) included in stockholders’ equity			Purchases			Sales			Transfers in (1)		Transfers out (1)			Balance, end of period
Fixed Maturity Securities
United States Government and government agencies and authorities	$	12,223	$	(1	)	$	(10	)	$	3,980		$	(100	)	$	0	$	(11,682	)	$	4,410
Foreign governments		21,947		(1	)		278			0			0			0		0			22,224
Asset-backed		0		0			(28	)		0						506					478
Commercial mortgage-backed		995		0			(10	)		0			(37	)		0		0			948
Corporate		127,557		(2,471	)		111			13,801			(4,923	)		9,911		0			143,986
Equity Securities
Non-redeemable preferred stocks		35		0			(13	)		0			0			0		0			22
Other investments		8,699		7,787			(68	)		4,190			(236	)		0		0			20,372
Other assets		8,623		(716	)		0			0			0			0		0			7,907
Financial Liabilities
Other liabilities		0		(189	)		0			(2,675	)		0			0		0			(2,864	)

Total level 3 assets and liabilities	$	180,079	$	4,409		$	260		$	19,296		$	(5,296	)	$	10,417	$	(11,682	)	$	197,483

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	Nine Months Ended September 30, 2012
	Balance, beginning of period			Total (losses) gains (realized/ unrealized) included in earnings			Net unrealized gains (losses) included in stockholders’ equity			Purchases		Sales			Transfers in (1)		Transfers out (1)			Balance, end of period
Fixed Maturity Securities
United States Government and government agencies and authorities	$	4,400		$	(2	)	$	(6	)	$	0	$	(213	)	$	0	$	0		$	4,179
Foreign governments		22,713			81			1,747			0		(682	)		0		0			23,859
Asset-backed		453			0			0			0		0			0		(453	)		0
Commercial mortgage-backed		904			34			(34	)		0		(1,249	)		2,894		0			2,549
Residential mortgage-backed		1,867			(9	)		241			1,930		(718	)		7,065		(1,866	)		8,510
Corporate		137,629			(290	)		9,337			2,155		(11,268	)		18,701		(1,453	)		154,811
Equity Securities
Non-redeemable preferred stocks		13			0			2			0		0			1		(15	)		1
Other investments		18,257			(693	)		592			0		(8,500	)		1,488		(627	)		10,517
Other assets		8,521			(2,214	)		0			0		0			0		0			6,307
Financial Liabilities
Other liabilities		(2,720	)		630			0			0		0			0		0			(2,090	)

Total level 3 assets and liabilities	$	192,037		$	(2,463	)	$	11,879		$	4,085	$	(22,630	)	$	30,149	$	(4,414	)	$	208,643

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	Nine Months Ended September 30, 2011
	Balance, beginning of period		Total gains (losses) (realized/ unrealized) included in earnings			Net unrealized gains (losses) included in stockholders’ equity			Purchases			Sales			Transfers in (1)		Transfers out (1)			Balance, end of period
Fixed Maturity Securities
United States Government and government agencies and authorities	$	14,506	$	(248	)	$	(47	)	$	3,980		$	(2,099	)	$	0	$	(11,682	)	$	4,410
Foreign governments		25,621		(3	)		726			0			0			0		(4,120	)		22,224
Asset-backed		0		0			(28	)		0			0			506		0			478
Commercial mortgage-backed		4,542		0			17			0			(109	)		0		(3,502	)		948
Corporate		125,685		(2,870	)		4,577			27,427			(25,790	)		17,512		(2,555	)		143,986
Equity Securities
Non-redeemable preferred stocks		558		(28	)		67			0			(574	)		6		(7	)		22
Other investments		8,309		8,516			199			4,190			(842	)		0		0			20,372
Other assets		9,825		(1,918	)		0			0			0			0		0			7,907
Financial Liabilities
Other liabilities		0		(189	)		0			(2,675	)		0			0		0			(2,864	)

Total level 3 assets and liabilities	$	189,046	$	3,260		$	5,511		$	32,922		$	(29,414	)	$	18,024	$	(21,866	)	$	197,483

(1)	Transfers are primarily attributable to changes in the availability of observable market information and re-evaluation of the observability of pricing inputs.

Three different valuation techniques can be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date (such as for mutual funds and money market funds). Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques and the multi-period excess earnings method.

Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

While not all three approaches are applicable to all financial assets or liabilities, where appropriate, one or more valuation techniques may be used. For all the classes of financial assets and liabilities included in the above hierarchy, excluding the CPI Caps and certain privately placed corporate bonds, the market valuation technique is generally used. For certain privately placed corporate bonds and the CPI Caps, the income valuation technique is generally used. For the periods ended September 30, 2012 and December 31, 2011, the application of the valuation technique applied to the Company’s classes of financial assets and liabilities has been consistent.

Level 1 Securities

The Company’s investments and liabilities classified as Level 1 as of September 30, 2012 and December 31, 2011, consisted of mutual funds and money market funds, foreign government fixed maturities and common stocks that are publicly listed and/or actively traded in an established market.

Level 2 Securities

The Company’s Level 2 securities are valued using various observable market inputs obtained from a pricing service. The 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. The fair value measurements and disclosures guidance defines 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. The 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. The 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, offers and reference data including market research data. Further details for Level 2 investment types follow:

United States Government and government agencies and authorities: United States government and government agencies and authorities securities are priced by our pricing vendor utilizing standard inputs. Included in this category are U.S. Treasury securities which are priced using vendor trading platform data in addition to the standard inputs.

State, municipalities and political subdivisions: State, municipalities and political subdivisions securities are priced by our pricing service utilizing material event notices and new issue data inputs in addition to the standard inputs.

Foreign governments: Foreign government securities are primarily fixed maturity securities denominated in Canadian dollars which are priced by our pricing service utilizing standard inputs. The pricing service also evaluates each security based on relevant market information including relevant credit information, perceived market movements and sector news.

Commercial mortgage-backed, residential mortgage-backed and asset-backed: Commercial mortgage-backed, residential mortgage-backed and asset-backed securities are priced by our pricing vendor utilizing monthly payment information and collateral performance information in addition to standard inputs. Additionally, commercial mortgage-backed securities and asset-backed securities utilize new issue data while residential mortgage-backed securities utilize vendor trading platform data.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Corporate: Corporate securities are priced by our pricing vendor utilizing standard inputs. Non-investment grade securities within this category are priced by our pricing vendor utilizing observations of equity and credit default swap curves related to the issuer in addition to standard inputs. Certain privately placed corporate bonds are priced by a non-pricing service source using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons.

Non-redeemable preferred stocks: Non-redeemable preferred stocks are priced by our pricing vendor utilizing observations of equity and credit default swap curves related to the issuer in addition to standard inputs.

Short-term investments, collateral held/pledged under securities, other investments, cash equivalents, and assets/liabilities held in separate accounts: To price the fixed maturity securities in these categories, the pricing service utilizes the standard inputs.

Valuation models used by the pricing service can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security. 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 qualified sources. If the Company cannot corroborate the non-binding broker quotes with Level 2 inputs, these securities are categorized as Level 3 securities.

Level 3 Securities

The Company’s investments classified as Level 3 as of September 30, 2012 and December 31, 2011, consisted of fixed maturity securities and derivatives. All of the Level 3 fixed maturity and equity securities are priced using non-binding broker quotes which cannot be corroborated with Level 2 inputs. Of our total Level 3 fixed maturity and equity securities, $103,043 and $99,920 were priced by a pricing service using single broker quotes due to insufficient information to provide an evaluated price as of September 30, 2012 and December 31, 2011, respectively. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The remaining $98,283 and $82,522 were priced internally using independent and non-binding broker quotes as of September 30, 2012 and December 31, 2011, respectively. The inputs factoring into the broker quotes include trades in the actual bond being priced, trades of comparable bonds, quality of the issuer, optionality, structure and liquidity. Significant changes in interest rates, issuer credit, liquidity, and overall market conditions would result in a significantly lower or higher broker quote. The prices received from both the pricing service and internally are reviewed for reasonableness by management and if necessary, management works with the pricing service or broker to further understand how they developed their price. Further details on Level 3 derivative investment types follow:

Other investments and other liabilities: Swaptions are priced using a Black-Scholes pricing model incorporating third-party market data, including swap volatility data.

Other assets: Non-pricing service source prices the CPI Cap derivatives 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 financial 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 significantly over time or among market participants,

•

The prices are stale (i.e., not current), and

•

The magnitude of the bid-ask spread.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets.

The Company generally obtains one price for each financial 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 financial assets in the fair value hierarchy.

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

The Company also measures the fair value of certain assets on a non-recurring basis, generally on an annual basis, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include commercial mortgage loans, goodwill and finite-lived intangible assets.

The Company utilizes both the income and market valuation approaches to measure the fair value of its reporting units when required. Under the income approach, the Company determined the fair value of the reporting units considering distributable earnings, which were estimated from operating plans. The resulting cash flows were then discounted using a market participant weighted average cost of capital estimated for the reporting units. After discounting the future discrete earnings to their present value, the Company estimated the terminal value attributable to the years beyond the discrete operating plan period. The discounted terminal value was then added to the aggregate discounted distributable earnings from the discrete operating plan period to estimate the fair value of the reporting units. Under the market approach, the Company derived the fair value of the reporting units based on various financial multiples, including but not limited to: price to tangible book value of equity, price to estimated 2012 earnings and price to estimated 2013 earnings, which were estimated based on publicly available data related to comparable guideline companies. In addition, financial multiples were also estimated from publicly available purchase price data for acquisitions of companies operating in the insurance industry. The estimated fair value of the reporting units was more heavily weighted towards the income approach because in the current economic environment the earnings capacity of a business is generally considered the most important factor in the valuation of a business enterprise. This fair value determination was categorized as Level 3 (unobservable) in the fair value hierarchy.

Fair Value of Financial Instruments Disclosures

The financial instruments guidance requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets. However, this guidance excludes certain financial instruments, including those related to insurance contracts and those accounted for under the equity method and joint ventures guidance (such as real estate joint ventures).

For the financial instruments included within the following financial assets and financial liabilities, the carrying value in the consolidated balance sheets equals or approximates fair value. Please refer to the Fair Value Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures section above for more information on the financial instruments included within the following financial assets and financial liabilities and the methods and assumptions used to estimate fair value:

•

Cash and cash equivalents

•

Fixed maturity securities

•

Equity securities

•

Short-term investments

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

•

Collateral held/pledged under securities agreements

•

Other investments

•

Other assets

•

Assets held in separate accounts

•

Other liabilities

•

Liabilities related to separate accounts

In estimating the fair value of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets, the Company used the following methods and assumptions:

Commercial mortgage loans: the fair values of mortgage loans are estimated using discounted cash flow models. The model inputs include mortgage amortization schedules and loan provisions, an internally developed credit spread based on the credit risk associated with the borrower and the treasury spot curve. Mortgage loans with similar characteristics are aggregated for purposes of the calculations.

Policy loans: the carrying value of policy loans reported in the balance sheets approximates fair value.

Policy reserves under investment products: the fair values for the Company’s policy reserves under investment products are determined using discounted cash flow analysis. Key inputs to the valuation include projections of policy cash flows, reserve run-off, market yields and risk margins.

Funds held under reinsurance: the carrying value reported approximates fair value due to the short maturity of the instruments.

Debt: the fair value of debt is based upon matrix pricing performed by the pricing service utilizing the standard inputs.

Obligations under securities agreements: obligation under securities agreements is reported at the amount of cash received from the selected broker/dealers.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The following table discloses the carrying value, fair value amount and hierarchy level of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets:


	September 30, 2012
			Fair Value
Financial Assets	Carrying Value		Total		Level 1		Level 2		Level 3
Commercial mortgage loans on real estate	$	1,302,373	$	1,464,649	$	0	$	0	$	1,464,649
Policy loans		53,924		53,924		53,924		0		0

Total financial assets	$	1,356,297	$	1,518,573	$	53,924	$	0	$	1,464,649


Financial Liabilities

Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal)	$	872,438	$	894,480	$	0	$	0	$	894,480
Funds withheld under reinsurance		60,703		60,703		60,703		0		0
Debt		972,368		1,046,368		0		1,046,368		0
Obligation under securities agreements		94,024		94,024		94,024		0		0

Total financial liabilities	$	1,999,533	$	2,095,575	$	154,727	$	1,046,368	$	894,480


	December 31, 2011
			Fair Value
Financial Assets	Carrying Value		Total		Level 1		Level 2		Level 3
Commercial mortgage loans on real estate	$	1,309,687	$	1,439,753	$	0	$	0	$	1,439,753
Policy loans		54,192		54,192		54,192		0		0

Total financial assets	$	1,363,879	$	1,493,945	$	54,192	$	0	$	1,439,753


Financial Liabilities

Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal)	$	865,021	$	864,068	$	0	$	0	$	864,068
Funds withheld under reinsurance		64,413		64,413		64,413		0		0
Debt		972,278		1,016,562		0		1,016,562		0
Obligation under securities agreements		95,494		95,494		95,494		0		0

Total financial liabilities	$	1,997,206	$	2,040,537	$	159,907	$	1,016,562	$	864,068

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Only the fair value of the Company’s policy reserves for investment-type contracts (those without significant mortality or morbidity risk) are reflected in the table above.

Reinsurance Recoverables Credit Disclosures

A key credit quality indicator for reinsurance is the A.M. Best financial strength ratings of the reinsurer. The A.M. Best ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for new reinsurance agreements where there is material credit exposure are reviewed at the time of execution. The A.M. Best ratings for existing reinsurance agreements are reviewed on a periodic basis, at least annually. The A.M. Best ratings have not changed significantly since December 31, 2011.

An allowance for doubtful accounts for reinsurance recoverables is recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management’s experience and current economic conditions. Information about the allowance for doubtful accounts for reinsurance recoverable as of September 30, 2012 is as follows:


Balance as of beginning-of-year	$	10,633
Provision		0
Other additions		0
Direct write-downs charged against the allowance		0

Balance as of the end-of-period	$	10,633

6. Income Taxes

At December 31, 2011, the cumulative amount of undistributed earnings for which the Company had not provided deferred income taxes was $138,248. During the second quarter of 2012, the Company adopted a plan to undergo a legal entity reorganization of its foreign subsidiaries to better align the structure for international growth. As a result of a revised plan of reorganization during the third quarter, the Company does not anticipate a significant change from prior year to the amount of undistributed earnings for which the Company has not provided deferred income taxes.

During the nine months ended September 30, 2011, the Company recognized a cumulative income tax benefit of $80,252 related to the release of a portion of the valuation allowance due to sufficient taxable income of the appropriate character during the period from new planning strategies. The $80,252 consists of $80,000 of capital losses and $252 of operating losses.

7. Debt

In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000 (the “Senior Notes”). The Company received net proceeds of $971,537 from this transaction, which represents the principal amount less the discount. The discount of $3,463 is being amortized over the life of the Senior Notes and is included as part of interest expense on the statement of operations. The first series is $500,000 in principal amount, bears interest at 5.63% per year and is payable in a single installment due February 15, 2014 and was issued at a 0.11% discount. The second series is $475,000 in principal amount, bears interest at 6.75% per year and is payable in a single installment due February 15, 2034 and was issued at a 0.61% discount.

The interest expense incurred related to the Senior Notes was $15,047 for the three months ended September 30, 2012 and 2011, respectively, and $45,141 for the nine months ended September 30, 2012 and 2011, respectively. There was $7,523 of accrued interest at September 30, 2012 and 2011, respectively. The Company made interest payments of $30,094 on February 15, 2012 and 2011 and August 15, 2012 and 2011.

Credit Facility

The Company’s commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the commercial paper program or in an amount sufficient to maintain the ratings assigned to the notes issued from the commercial paper program. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities at their level. This program is currently backed up by a $350,000 senior revolving credit facility, of which $330,240 was available at September 30, 2012, due to outstanding letters of credit.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

On September 21, 2011, the Company entered into a four-year unsecured $350,000 revolving credit agreement (“2011 Credit Facility”) with a syndicate of banks arranged by JP Morgan Chase Bank, N.A. and Bank of America, N.A. The 2011 Credit Facility replaced the Company’s prior three-year $350,000 revolving credit facility (“2009 Credit Facility”), which was entered into on December 18, 2009 and was scheduled to expire in December 2012. The 2009 Credit Facility terminated upon the effective date of the 2011 Credit Facility. The 2011 Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and/or letters of credit from a sole issuing bank in an aggregate amount of $350,000 and is available until September 2015, provided the Company is in compliance with all covenants. The 2011 Credit Facility has a sublimit for letters of credit issued thereunder of $50,000. The proceeds of these loans may be used for the Company’s commercial paper program or for general corporate purposes. The Company may increase the total amount available under the 2011 Credit Facility to $525,000 subject to certain conditions. No bank is obligated to provide commitments above their share of the $350,000 facility.

The Company did not use the commercial paper program during the nine months ended September 30, 2012 and 2011 and there were no amounts outstanding relating to the commercial paper program at September 30, 2012 and December 31, 2011. The Company made no borrowings using the 2011 Credit Facility and no loans are outstanding at September 30, 2012. The Company had $19,760 of letters of credit outstanding under the 2011 Credit Facility as of September 30, 2012.

The 2011 Credit Facility contains restrictive covenants and requires that the Company maintain certain specified minimum ratios and thresholds. Among others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. At September 30, 2012, the Company was in compliance with all covenants, minimum ratios and thresholds.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

8. Accumulated Other Comprehensive Income

Certain amounts included in the consolidated statements of comprehensive income are net of reclassification adjustments. The following table summarizes those reclassification adjustments as of the dates indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012			2011
	(in thousands)
Reclassification of net realized gains on sales of securities included in net income, net of taxes	$	4,029	$	1,241	$	18,004		$	11,092

Reclassification of net realized losses on sales of securities previously written down included in net income, net of taxes	$	0	$	5	$	(92	)	$	(973	)

Reclassification of amortization of prior service cost included in net income, net of taxes	$	3,840	$	2,274	$	11,315		$	8,059

9. Stock Based Compensation

Long-Term Equity Incentive Plan

In May 2008, the Company’s shareholders approved the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”), which authorized the granting of up to 3,400,000 shares of the Company’s common stock to employees, officers and non-employee directors. In May 2010, the Company’s shareholders approved an amended and restated ALTEIP, increasing the number of shares of the Company’s common stock authorized for issuance to 5,300,000. Under the ALTEIP, the Company may grant awards based on shares of its common stock, including stock options, stock appreciation rights (“SARs”), restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All future share-based grants will be awarded under the ALTEIP.

The Compensation Committee of the Board of Directors (the “Compensation Committee”) awarded PSUs and RSUs in 2012 and 2011. RSUs and PSUs are promises to issue actual shares of common stock at the end of a vesting period or performance period. The RSUs granted to employees under the ALTEIP were based on salary grade and performance and will vest one-third each year over a three-year period. RSUs granted to non-employee directors also vest one-third each year over a three-year period. RSUs receive dividend equivalents in cash during the restricted period and do not have voting rights during the restricted period. PSUs accrue dividend equivalents during the performance period based on a target payout, and will be paid in cash at the end of the performance period based on the actual number of shares issued.

For the PSU portion of an award, the number of shares a participant will receive upon vesting is contingent upon the Company’s performance with respect to selected metrics, identified below, compared against a broad index of insurance companies and assigned a percentile ranking. These rankings are then averaged to determine the composite percentile ranking for the performance period. The payout levels can vary between 0% and 150% (maximum) of the target (100%) ALTEIP award amount based on the Company’s level of performance against the selected metrics.

PSU Performance Goals. For 2012 and 2011, the Compensation Committee established book value per share (“BVPS”) growth excluding AOCI, revenue growth and total stockholder return as the three performance measures for PSU awards. BVPS growth is defined as the year-over-year growth of the Company’s stockholders’ equity excluding AOCI divided by the number of fully diluted total shares outstanding at the end of the period. Revenue growth is defined as the year-over-year change in GAAP total revenues as disclosed in the Company’s annual statement of operations. Total stockholder return is defined as appreciation in Company stock plus dividend yield to stockholders. For the 2012-2014 and 2011-2013 performance cycles, payouts will be determined by measuring performance against the average performance of companies included in the A.M. Best Insurance Index, excluding those with revenues of less than $1,000,000 or that are not in the health or insurance Global Industry Classification Standard codes.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

Under the ALTEIP, the Company’s Chief Executive Officer (“CEO”) is authorized by the Board of Directors to grant common stock, restricted stock and RSUs to employees other than the executive officers of the Company (as defined in Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). The Board of Directors reviews and ratifies these grants quarterly. Restricted stock and RSUs granted under this program may have different vesting periods.

Restricted Stock Units

RSUs granted to employees and to non-employee directors were 25,160 and 23,181 for the three months ended September 30, 2012 and 2011, respectively, and 526,051 and 515,746 for the nine months ended September 30, 2012 and 2011, respectively. The compensation expense recorded related to RSUs was $5,593 and $5,219 for the three months ended September 30, 2012 and 2011, respectively, and $15,993 and $14,984 for the nine months ended September 30, 2012 and 2011, respectively. The related total income tax benefit was $1,952 and $1,822 for the three months ended September 30, 2012 and 2011, respectively, and $5,591 and $5,230 for the nine months ended September 30, 2012 and 2011, respectively. The weighted average grant date fair value for RSUs granted during the nine months ended September 30, 2012 and 2011 was $41.16 and $38.15, respectively.

As of September 30, 2012, there was $22,618 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.25 years. The total fair value of RSUs vested during the three months ended September 30, 2012 and 2011 was $1,085 and $1,842, respectively, and $21,385 and $16,333 for the nine months ended September 30, 2012 and 2011, respectively.

Performance Share Units

No PSUs were granted during the three months ended September 30, 2012 and 2011. PSUs granted to employees were 407,506 and 401,735 for the nine months ended September 30, 2012 and 2011, respectively. The compensation expense recorded related to PSUs was $5,484 and $3,982 for the three months ended September 30, 2012 and 2011, respectively, and $8,691 and $7,854 for the nine months ended September 2012 and 2011, respectively. Portions of the compensation expense recorded during 2012, 2011 and 2010 were reversed in 2012 and 2011, respectively, since the Company’s level of actual performance as measured against pre-established performance goals had declined. The related total income tax benefit was $1,912 and $1,390 for the three months ended September 30, 2012 and 2011, respectively and $3,041 and $2,740 for the nine months ended September 30, 2012 and 2011, respectively. The weighted average grant date fair value for PSUs granted during the nine months ended September 30, 2012 and 2011 was $41.68 and $37.83, respectively.

As of September 30, 2012, there was $15,445 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 0.95 years.

The fair value of PSUs with market conditions was estimated on the date of grant using a Monte Carlo simulation model, which utilizes multiple variables that determine the probability of satisfying the market condition stipulated in the award. Expected volatilities for awards issued during the nine months ended September 30, 2012 and 2011 were based on the historical stock prices of the Company’s stock and peer insurance group. The expected term for grants issued during the nine months ended September 30, 2012 and 2011 was assumed to equal the average of the vesting period of the PSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.

Long-Term Incentive Plan

Prior to the approval of the ALTEIP, share based awards were granted under the 2004 Assurant Long-Term Incentive Plan (“ALTIP”), which authorized the granting of up to 10,000,000 new shares of the Company’s common stock to employees and officers under the ALTIP, Business Value Rights Program (“BVR”) and CEO Equity Grants Program. Under the ALTIP, the Company was authorized to grant restricted stock and SARs. Since May 2008, no new grants have been made under this plan and the impact of these grants on the consolidated financial statements is immaterial.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase shares at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period. The compensation expense recorded related to the ESPP was $319 and $321 for the three months ended September 30, 2012 and 2011, respectively, and $1,077 and $985 for the nine months ended September 30, 2012 and 2011, respectively.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

In January 2012, the Company issued 103,243 shares at a discounted price of $32.98 for the offering period of July 1, 2011 through December 31, 2011. In January 2011, the Company issued 111,414 shares at a discounted price of $31.06 for the offering period of July 1, 2010 through December 31, 2010.

In July 2012, the Company issued 110,699 shares to employees at a discounted price of $31.36 for the offering period of January 1, 2012 through June 30, 2012. In July 2011, the Company issued 106,373 shares to employees at a discounted price of $32.64 for the offering period of January 1, 2011 through June 30, 2011.

The fair value of each award under the ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current annualized dividend and share price as of the grant date.

10. Stock Repurchase

The following table shows the shares repurchased during the periods indicated:


Period in 2012	Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs
January		978,000	$	39.50		978,000
February		528,000		43.37		528,000
March		912,000		41.47		912,000
April		912,800		39.58		912,800
May		1,062,000		34.58		1,062,000
June		2,581,021		33.83		2,581,021
July		1,444,639		34.52		1,444,639
August		180,000		34.78		180,000
September		1,449,000		37.07		1,449,000

Total		10,047,460	$	36.76		10,047,460

On January 18, 2011, the Company’s Board of Directors authorized the Company to repurchase up to $600,000 of its outstanding common stock. On May 14, 2012, the Company’s Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock, making the total remaining under the authorization $733,275 as of that date.

During the nine months ended September 30, 2012, the Company repurchased 10,047,460 shares of the Company’s outstanding common stock at a cost of $369,157, exclusive of commissions, leaving $536,235 remaining at September 30, 2012 under the total repurchase authorization.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

11. Earnings Per Common Share

The following table presents net income, the weighted average common shares used in calculating basic earnings per common share (“EPS”) and those used in calculating diluted EPS for each period presented below.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator
Net income	$	126,288		$	74,037		$	458,718		$	379,804
Deduct dividends paid		(17,284	)		(17,178	)		(52,633	)		(50,858	)

Undistributed earnings	$	109,004		$	56,859		$	406,085		$	328,946

Denominator
Weighted average shares outstanding used in basic earnings per share calculations		82,156,838			95,351,601			85,723,387			98,065,082
Incremental common shares from :
SARs		119,925			167,924			135,626			193,330
PSUs		676,488			783,487			733,493			702,300
ESPPs		6,202			0			6,202			0

Weighted average shares used in diluted earnings per share calculations		82,959,453			96,303,012			86,598,708			98,960,712

Earnings per common share - Basic
Distributed earnings	$	0.21		$	0.18		$	0.60		$	0.52
Undistributed earnings		1.33			0.60			4.75			3.35

Net income	$	1.54		$	0.78		$	5.35		$	3.87

Earnings per common share - Diluted
Distributed earnings	$	0.21		$	0.18		$	0.60		$	0.52
Undistributed earnings		1.31			0.59			4.70			3.32

Net income	$	1.52		$	0.77		$	5.30		$	3.84

Average SARs totaling 1,825,748 and 2,184,815 for the three and nine months ended September 30, 2011, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. No SARs were anti-dilutive for the three and nine months ended September 30, 2012. Average PSUs totaling 191 for the nine months ended September 30, 2012 were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. There were no anti-dilutive PSUs outstanding during the three months ended September 30, 2012 or the three and nine months ended September 30, 2011.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

12. Retirement and Other Employee Benefits

The components of net periodic benefit cost for the Company’s qualified pension benefits plan, nonqualified pension benefits plan and retirement health benefits plan for the three and nine months ended September 30, 2012 and 2011 were as follows:


	Qualified Pension Benefits						Nonqualified Pension Benefits (1)				Retirement Health Benefits
	For the Three Months Ended September 30,						For the Three Months Ended September 30,				For the Three Months Ended September 30,
	2012			2011			2012		2011		2012			2011
Service cost	$	7,788		$	6,677		$	966	$	763	$	681		$	567
Interest cost		8,211			8,160			1,463		1,475		867			833
Expected return on plan assets		(9,932	)		(10,074	)		0		0		(609	)		(754	)
Amortization of prior service cost		24			24			167		199		(242	)		(238	)
Amortization of net loss (gain)		4,833			3,026			1,126		633		0			(145	)
Curtailment credit / special termination benefits		0			0			0		136		0			0

Net periodic benefit cost	$	10,924		$	7,813		$	3,722	$	3,206	$	697		$	263


	Qualified Pension Benefits						Nonqualified Pension Benefits (1)				Retirement Health Benefits
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,				For the Nine Months Ended September 30,
	2012			2011			2012		2011		2012			2011
Service cost	$	24,038		$	22,177		$	2,816	$	2,213	$	2,081		$	2,667
Interest cost		24,511			24,910			4,163		4,375		2,617			3,083
Expected return on plan assets		(30,132	)		(30,624	)		0		0		(2,159	)		(2,204	)
Amortization of prior service cost		74			74			517		499		(692	)		512
Amortization of net loss (gain)		14,283			9,426			3,226		2,033		0			(145	)
Curtailment credit / special termination benefits		0			0			0		386		0			0

Net periodic benefit cost	$	32,774		$	25,963		$	10,722	$	9,506	$	1,847		$	3,913

(1)	The Company’s nonqualified plan is unfunded.

Our qualified pension benefits plan (the “Plan”) was under-funded by $161,939 and $125,517 (based on the fair value of Plan assets compared to the projected benefit obligation) at September 30, 2012 and December 31, 2011, respectively. This equates to an 81% and 83% funded status at September 30, 2012 and December 31, 2011, respectively. The change in under-funded status is mainly due to a decrease in the discount rate used to determine the projected benefit obligation, partially offset by favorable investment returns. During the first nine months of 2012, $37,500 in cash was contributed to the Plan. Additional cash, up to $12,500, is expected to be contributed to the Plan over the remainder of 2012.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

13. Segment Information

The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Assurant Solutions provides debt protection administration, credit-related insurance, warranties and service contracts, and pre-funded funeral insurance. Assurant Specialty Property provides lender-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual health and small employer group health insurance. Assurant Employee Benefits primarily provides group dental insurance, group disability insurance, and group life insurance. Corporate & Other includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

The Company evaluates performance of the operating segments based on segment income (loss) after-tax excluding realized gains (losses) on investments. The Company determines reportable segments in a manner consistent with the way the Company organizes for purposes of making operating decisions and assessing performance.

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)

The following tables summarize selected financial information by segment:


	Three Months Ended September 30, 2012
	Solutions		Specialty Property		Health		Employee Benefits		Corporate & Other			Consolidated
Revenues
Net earned premiums and other considerations	$	669,742	$	518,868	$	397,248	$	252,623	$	0		$	1,838,481
Net investment income		97,558		25,022		10,253		31,488		5,112			169,433
Net realized gains on investments		0		0		0		0		8,460			8,460
Amortization of deferred gain on disposal of businesses		0		0		0		0		4,600			4,600
Fees and other income		82,866		26,034		7,795		7,043		368			124,106

Total revenues		850,166		569,924		415,296		291,154		18,540			2,145,080

Benefits, losses and expenses
Policyholder benefits		219,430		216,755		287,085		173,309		(1,099	)		895,480
Amortization of deferred acquisition costs and value of business acquired		271,652		85,629		43		6,672		0			363,996
Underwriting, general and administrative expenses		302,399		132,397		105,777		91,297		30,037			661,907
Interest expense		0		0		0		0		15,078			15,078

Total benefits, losses and expenses		793,481		434,781		392,905		271,278		44,016			1,936,461

Segment income (loss) before provision (benefit) for income tax		56,685		135,143		22,391		19,876		(25,476	)		208,619
Provision (benefit) for income taxes		19,983		45,748		11,131		6,630		(1,161	)		82,331

Segment income (loss) after tax	$	36,702	$	89,395	$	11,260	$	13,246	$	(24,315	)

Net income												$	126,288

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2012 and 2011

(In thousands, except number of shares and per share amounts)


	Three Months Ended September 30, 2011
	Solutions		Specialty Property		Health		Employee Benefits		Corporate & Other		Consolidated
Revenues
Net earned premiums and other considerations	$	600,679	$	476,712	$	428,971	$	270,953	$	0

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