Assurant 2014 Annual Report Download - page 78

64 ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
The following table presents our fi xed maturity investment portfolio by ratings of the nationally recognized securities rating
organizations as of the dates indicated:
Rating
December 31, 2014 December 31, 2013
Fair Value Percentage of Total Fair Value Percentage of Total
Aaa/Aa/A $ 7,314,208 65% $ 7,214,256 64%
Baa 3,255,505 29% 3,316,035 29%
Ba 432,203 4% 523,175 5%
B and lower 261,258 2% 238,409 2%
TOTAL $ 11,263,174 100% $ 11,291,875 100%
We are also exposed to the credit risk of our reinsurers. When
we reinsure, we are still liable to our insureds regardless of
whether we get reimbursed by our reinsurer. As part of our
overall risk and capacity management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments as described above under “Item 7 —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Reinsurance.”
We had $7,254,585 and $5,752,134 of reinsurance recoverables
as of December 31, 2014 and 2013, respectively, the majority
of which are protected from credit risk by various types of risk
mitigation mechanisms such as trusts, letters of credit or by
withholding the assets in a modifi ed coinsurance or co-funds-
withheld arrangement. For example, reserves of $1,077,791
and $3,471,908 as of December 31, 2014 and $1,101,847 and
$2,578,329 as of December 31, 2013, relating to two large
coinsurance arrangements with The Hartford and John Hancock
(a subsidiary of Manulife Financial Corporation), respectively,
related to sales of businesses are backed by trusts. If the
value of the assets in these trusts falls below the value of
the associated liabilities, The Hartford and John Hancock,
as the case may be, will be required to put more assets in
the trusts. We may be dependent on the fi nancial condition
of The Hartford and John Hancock, whose A.M. Best ratings
are currently A- and A+, respectively. A.M. Best currently
maintains a stable outlook on the fi nancial strength ratings of
both The Hartford and John Hancock. For recoverables that
are not protected by these mechanisms, we are dependent
solely on the credit of the reinsurer. See “Item 1A – Risk
Factors – Risks Related to Our Company – Reinsurance may
not be available or adequate to protect us against losses,
and we are subject to the credit risk of reinsurers” and “– We
have sold businesses through reinsurance that could again
become our direct fi nancial and administrative responsibility
if the purchasing companies were to become insolvent.”
A majority of our reinsurance exposure has been ceded to
companies rated A- or better by A.M. Best.
Infl ation Risk
Infl ation risk arises as we invest in assets, which are not
indexed to the level of infl ation, whereas the corresponding
liabilities are indexed to the level of infl ation. Approximately
5% of Assurant preneed insurance policies, with reserves of
$268,161 and $283,968 as of December 31, 2014 and 2013,
respectively, have death benefi ts that are guaranteed to
grow with the CPI. In times of rapidly rising infl ation, the
credited death benefi t growth on these liabilities increases
relative to the investment income earned on the nominal
assets resulting in an adverse impact on earnings. We have
partially mitigated this risk by purchasing derivative contracts
with payments tied to the CPI. See “— Derivatives.”
In addition, we have infl ation risk in our individual and small
employer group health insurance businesses to the extent
that medical costs increase with infl ation, and we have not
been able to increase premiums to keep pace with infl ation.
Foreign Exchange Risk
We are exposed to foreign exchange risk arising from our
international operations, mainly in Canada. We also have
foreign exchange risk exposure to the British pound, Brazilian
Real, Euro, Mexican Peso and Argentine Peso. Total invested
assets denominated in currencies other than the Canadian
dollar were approximately 2% of our total invested assets
at December 31, 2014 and 2013, respectively.
Foreign exchange risk is mitigated by matching our liabilities
under insurance policies that are payable in foreign currencies
with investments that are denominated in such currency.
We have not established any hedge to our foreign currency
exchange rate exposure.