Assurant 2014 Annual Report Download - page 76

62 ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
Liabilities for future policy benefi ts and expenses of $9,483,672
and claims and benefi ts payable of $3,698,606 have been
included in the commitments and contingencies table.
Signifi cant uncertainties relating to these liabilities include
mortality, morbidity, expenses, persistency, investment
returns, infl ation, contract terms and the timing of payments.
Letters of Credit
In the normal course of business, letters of credit are issued
primarily to support reinsurance arrangements. These letters
of credit are supported by commitments with fi nancial
institutions. We had $17,871 and $17,343 of letters of credit
outstanding as of December 31, 2014 and December 31,
2013, respectively.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet
arrangements that are reasonably likely to have a material
effect on the fi nancial condition, results of operations,
liquidity, or capital resources of the Company.
ITEM 7A Quantitative and Qualitative Disclosures
About Market Risk
As a provider of insurance products, effective risk management
is fundamental to our ability to protect both our customers’
and stockholders’ interests. We are exposed to potential loss
from various market risks, in particular interest rate risk and
credit risk. Additionally, we are exposed to infl ation risk and
to a lesser extent foreign currency risk.
Interest rate risk is the possibility that the fair value of
liabilities will change more or less than the market value of
investments in response to changes in interest rates, including
changes in investment yields and changes in spreads due to
credit risks and other factors.
Credit risk is the possibility that counterparties may not
be able to meet payment obligations when they become
due. We assume counterparty credit risk in many forms.
A counterparty is any person or entity from which cash or
other forms of consideration are expected to extinguish a
liability or obligation to us. Primarily, our credit risk exposure
is concentrated in our fi xed maturity investment portfolio
and, to a lesser extent, in our reinsurance recoverables.
Infl ation risk is the possibility that a change in domestic price
levels produces an adverse effect on earnings. This typically
happens when either invested assets or liabilities, but not
both is indexed to infl ation.
Foreign exchange risk is the possibility that changes in
exchange rates produce an adverse effect on earnings and
equity when measured in domestic currency. This risk is
largest when assets backing liabilities payable in one currency
are invested in fi nancial instruments of another currency.
Our general principle is to invest in assets that match the
currency in which we expect the liabilities to be paid.
Interest Rate Risk
Interest rate risk arises as we invest substantial funds in
interest-sensitive fi xed income assets, such as fi xed maturity
securities, mortgage-backed and asset-backed securities
and commercial mortgage loans, primarily in the U.S. and
Canada. There are two forms of interest rate risk — price risk
and reinvestment risk. Price risk occurs when fl uctuations in
interest rates have a direct impact on the market valuation of
these investments. As interest rates rise, the market value of
these investments falls, and conversely, as interest rates fall,
the market value of these investments rise. Reinvestment risk
is primarily associated with the need to reinvest cash fl ows
(primarily coupons and maturities) in an unfavorable lower
interest rate environment. In addition, for securities with
embedded options such as callable bonds, mortgage-backed
securities, and certain asset-backed securities, reinvestment
risk occurs when fl uctuations in interest rates have a direct
impact on expected cash fl ows. As interest rates fall, an
increase in prepayments on these assets results in earlier
than expected receipt of cash fl ows forcing us to reinvest the
proceeds in an unfavorable lower interest rate environment.
Conversely, as interest rates rise, a decrease in prepayments
on these assets results in later than expected receipt of cash
fl ows forcing us to forgo reinvesting in a favorable higher
interest rate environment.
We manage interest rate risk by selecting investments with
characteristics such as duration, yield, currency and liquidity
tailored to the anticipated cash outfl ow characteristics of
our insurance and reinsurance liabilities.
Our group long-term disability and group term life waiver of
premium reserves are also sensitive to interest rates. These
reserves are discounted to the valuation date at the valuation
interest rate. The valuation interest rate is determined by
taking into consideration actual and expected earned rates
on our asset portfolio.