Assurant 2010 Annual Report Download - page 22

16 ASSURANT, INC.  2010 Form 10K
PART I
ITEM 1A Risk Factors
Unfavorable conditions in the capital and credit
markets may signifi cantly and adversely aff ect our access
to capital and our ability to pay our debts or expenses.
 e global capital and credit markets experienced extreme volatility
and disruption during 2008 and through early 2009. In many cases,
companies’ ability to raise money was severely restricted. Although
conditions in the capital and credit markets have improved signifi cantly,
they could again deteriorate. Our ability to borrow or raise money is
important if our operating cash fl ow is insuffi cient to pay our expenses,
meet capital requirements, repay debt, pay dividends on our common
stock or make investments.  e principal sources of our liquidity
are insurance premiums, fee income, cash fl ow from our investment
portfolio and liquid assets, consisting mainly of cash or assets that are
readily convertible into cash. Sources of liquidity in normal markets
also include a variety of short- and long-term instruments.
If our access to capital markets is restricted, our cost of capital could
go up, thus decreasing our profi tability and reducing our fi nancial
fl exibility. Our results of operations, fi nancial condition, cash fl ows
and statutory capital position could be materially and adversely aff ected
by disruptions in the capital markets.
 e value of our investments could decline, aff ecting our
profi tability and fi nancial strength.
Investment returns are an important part of our profi tability. Signifi cant
fl uctuations in the fi xed maturity market could impair our profi tability,
fi nancial condition and/or cash fl ows. Our investments are subject
to market-wide risks and fl uctuations, as well as to risks inherent in
particular securities. In addition, certain factors aff ecting our business,
such as volatility of claims experience, could force us to liquidate
securities prior to maturity, causing us to incur capital losses. See
“Item 7A—Quantitative and Qualitative Disclosures About Market
Risk—Interest Rate Risk.”
 e performance of our investment portfolio is subject
to continuing fl uctuations due to changes in interest rates
and market conditions.
Changes in interest rates can materially adversely aff ect the performance
of some of our investments. Interest rate volatility can increase or reduce
unrealized gains or unrealized losses in our portfolios. Interest rates
are highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions
and other factors beyond our control. Fixed maturity and short-term
investments represented 81% of the fair value of our total investments
as of December 31, 2010.
 e fair market value of the fi xed maturity securities in our portfolio
and the investment income from these securities fl uctuate depending
on general economic and market conditions. Because all of our fi xed
maturity securities are classifi ed as available for sale, changes in the
market value of these securities are refl ected in our balance sheet.
 eir fair market value generally increases or decreases in an inverse
relationship with fl uctuations in interest rates, while net investment
income from fi xed-maturity investments increases or decreases directly
with interest rates. In addition, actual net investment income and/
or cash fl ows from investments that carry prepayment risk, such as
mortgage-backed and other asset-backed securities, may diff er from
those anticipated at the time of investment as a result of interest rate
fl uctuations. An increase in interest rates will also increase the net
unrealized losses in our current investment portfolio.
We employ asset/liability management strategies to reduce the adverse
eff ects of interest rate volatility and to increase the likelihood that cash
fl ows are available to pay claims as they become due. Our asset/liability
management strategies may fail to eliminate or reduce the adverse
eff ects of interest rate volatility, and signifi cant fl uctuations in the level
of interest rates may have a material adverse eff ect on our results of
operations and fi nancial condition. If our investment portfolio is not
appropriately matched with our insurance liabilities, we could also be
forced to liquidate investments prior to maturity at a signifi cant loss
to pay claims and policyholder benefi ts.
Our preneed insurance policies are generally whole life insurance policies
with increasing death benefi ts. In extended periods of declining interest
rates or rising infl ation, there may be compression in the spread between
the death benefi t growth rates on these policies and the investment
income that we can earn, resulting in a negative spread. As a result,
declining interest rates or high infl ation rates may have a material
adverse eff ect on our results of operations and our overall fi nancial
condition. See “Item 7A—Quantitative and Qualitative Disclosures
About Market Risk—Infl ation Risk” for additional information.
Assurant Employee Benefi ts calculates reserves for long-term disability
and life waiver of premium claims using net present value calculations
based on interest rates at the time reserves are established and expectations
regarding future interest rates. Waiver of premium refers to a provision
in a life insurance policy pursuant to which an insured with a disability
that lasts for a specifi ed period no longer has to pay premiums for the
duration of the disability or for a stated period, during which time the
life insurance coverage continues. If interest rates decline, reserves for
open and/or new claims in Assurant Employee Benefi ts would need
to be calculated using lower discount rates, thereby increasing the net
present value of those claims and the required reserves. We expect this
to happen in the fi rst quarter of 2011. Depending on the magnitude of
the decline, such changes could have a material adverse eff ect on our
results of operations and fi nancial condition. In addition, investment
income may be lower than that assumed in setting premium rates.
Our investment portfolio is subject to various risks that may
result in realized investment losses.
We are subject to credit risk in our investment portfolio, primarily
from our investments in corporate bonds, preferred stocks, leveraged
loans, municipal bonds, and commercial mortgages. Defaults by third
parties in the payment or performance of their obligations could
reduce our investment income and realized investment gains or result
in the continued recognition of investment losses.  e value of our
investments may be materially adversely aff ected by increases in interest
rates, downgrades in the corporate bonds included in the portfolio
and by other factors that may result in the continued recognition of
other-than-temporary impairments. Each of these events may cause us
to reduce the carrying value of our investment portfolio.
Further, the value of any particular fi xed maturity security is subject
to impairment based on the creditworthiness of a given issuer. As of
December 31, 2010, fi xed maturity securities represented 79% of the
fair value of our total invested assets. Our fi xed maturity portfolio also
includes below investment grade securities (rated “BB” or lower by
nationally recognized securities rating organizations).  ese investments
comprise approximately 7% of the fair value of our total investments as
of December 31, 2010 and generally provide higher expected returns,
but present greater risk and can be less liquid than investment grade
securities. A signifi cant increase in defaults and impairments on our
fi xed maturity investment portfolio could materially adversely aff ect