Assurant 2010 Annual Report Download - page 21

15ASSURANT, INC.  2010 Form 10K
PART I
ITEM 1A Risk Factors
Catastrophe losses, including man-made catastrophe
losses, could materially reduce our profi tability and have
a material adverse eff ect on our results of operations and
fi nancial condition.
Our insurance operations expose us to claims arising out of catastrophes,
particularly in our homeowners, life and other personal lines of business.
We have experienced, and expect to experience, catastrophe losses that
materially reduce our profi tability or have a material adverse eff ect on
our results of operations and fi nancial condition. Catastrophes can
be caused by various natural events, including, but not limited to,
hurricanes, windstorms, earthquakes, hailstorms, severe winter weather,
fi res, epidemics and the long-term eff ects of climate change, or can be
man-made catastrophes, including terrorist attacks or accidents such
as airplane crashes. While the frequency and severity of catastrophes
are inherently unpredictable, increases in the value and geographic
concentration of insured property, the geographic concentration of
insured lives, and the eff ects of infl ation could increase the severity of
claims from future catastrophes.
Catastrophe losses can vary widely and could signifi cantly exceed our
expectations.  ey may cause substantial volatility in our fi nancial
results for any fi scal quarter or year and could materially reduce our
profi tability or materially adversely aff ect our fi nancial condition. Our
ability to write new business also could be aff ected.
Because Assurant Specialty Property’s lender-placed homeowners and
lender-placed manufactured housing insurance products are designed
to automatically provide property coverage for client portfolios, our
concentration in certain catastrophe-prone states like Florida, California
and Texas may increase in the future. Furthermore, the withdrawal of
other insurers from these or other states may lead to adverse selection
and increased use of our products in these areas and may negatively
aff ect our loss experience.
 e exact impact of the physical eff ects of climate change is uncertain.
It is possible that changes in the global climate may cause long-term
increases in the frequency and severity of storms, resulting in higher
catastrophe losses, which could materially aff ect our results of operations
and fi nancial condition.
Our group life and health insurance operations could be materially
impacted by catastrophes such as a terrorist attack, a natural disaster, a
pandemic or an epidemic that causes a widespread increase in mortality
or disability rates or that causes an increase in the need for medical care.
If the severity of such an event were suffi ciently high, it could exceed
our reinsurance coverage limits and could have a material adverse eff ect
on our results of operations and fi nancial condition. In addition, with
respect to our preneed insurance policies, the average age of policyholders
is approximately 73 years.  is group is more susceptible to certain
epidemics than the overall population, and an epidemic resulting in a
higher incidence of mortality could have a material adverse eff ect on
our results of operations and fi nancial condition.
We may also lose premium income due to a large-scale business
interruption caused by a catastrophe combined with legislative or
regulatory reactions to the event.
A.M. Best, Moody’s, and S&P rate the fi nancial strength
of our insurance company subsidiaries, and a decline in
these ratings could aff ect our standing in the insurance
industry and cause our sales and earnings to decrease.
Ratings are an important factor in establishing the competitive position
of insurance companies. A.M. Best rates most of our domestic operating
insurance subsidiaries. Moody’s rates six of our domestic operating
insurance subsidiaries and S&P rates seven of our domestic operating
insurance subsidiaries.  ese ratings are subject to periodic review by
A.M. Best, Moody’s, and S&P, and we cannot assure that we will be
able to retain them. In 2010 for example, Moody’s lowered the fi nancial
strength rating of our rated life and health insurance subsidiaries from
A2 to A3 and lowered the senior debt rating of Assurant, Inc. from
Baa1 to Baa2, citing uncertainty surrounding the viability of several
of the Company’s core insurance products as a result of changes in the
health insurance marketplace due to the Aff ordable Care Act. S&P
currently has a negative outlook on our two principal health insurance
subsidiaries, citing uncertainty of operating performance under the
Aff ordable Care Act.
Rating agencies may change their methodology or requirements
for determining ratings, or they may become more conservative in
assigning ratings. Rating agencies or regulators could also increase capital
requirements for the Company or its subsidiaries. Any reduction in our
ratings could materially adversely aff ect the demand for our products
from intermediaries and consumers, and materially adversely aff ect
our results. In addition, any reduction in our fi nancial strength ratings
could materially adversely aff ect our cost of borrowing.
As of December 31, 2010, contracts representing approximately 17% of
Assurant Solutions’ and 24% of Assurant Specialty Property’s net earned
premiums and fee income contain provisions requiring the applicable
subsidiaries to maintain minimum A.M. Best fi nancial strength ratings
ranging from “A” or better to “B” or better, depending on the contract.
Our clients may terminate these contracts or fail to renew them if the
subsidiaries’ ratings fall below these minimums. Under our marketing
agreement with SCI, American Memorial Life Insurance Company
(“AMLIC”), one of our subsidiaries, is required to maintain an A.M.
Best fi nancial strength rating of “B” or better throughout the term of
the agreement. If AMLIC fails to maintain this rating for a period of
180 days, SCI may terminate the agreement.
Additionally, certain contracts in the DRMS business, representing
approximately 7% of Assurant Employee Benefi ts’ net earned premiums
for the year ended December 31, 2010 contain provisions requiring
the applicable subsidiaries to maintain minimum A.M. Best fi nancial
strength ratings of “A-” or better. DRMS clients may terminate the
agreements and, in some instances, recapture in-force business if the
ratings of applicable subsidiaries fall below “A-”. Similarly, distribution
and service agreements representing approximately 17% of Assurant
Health’s net earned premiums for the year ended December 31, 2010
contain provisions requiring the applicable subsidiaries to maintain
minimum A.M. Best fi nancial strength ratings of “A-” or better, for the
distribution agreements, or “B+” or better, for the service agreement. If
the ratings of applicable Assurant Health subsidiaries fall below these
threshold ratings levels, distribution and service partners could terminate
their agreements. Termination or failure to renew these agreements
could materially and adversely aff ect our results of operations and
fi nancial condition.