Assurant 2010 Annual Report Download - page 23

17ASSURANT, INC.  2010 Form 10K
PART I
ITEM 1A Risk Factors
our results of operations and fi nancial condition. See “Item 7A—
Quantitative and Qualitative Disclosures About Market Risk—Credit
Risk” for additional information on the composition of our fi xed
maturity investment portfolio.
We currently invest in a small amount of equity securities (approximately
3% of the fair value of our total investments as of December 31, 2010).
However, we have had higher percentages in the past and may make
more such investments in the future. Investments in equity securities
generally provide higher expected total returns, but present greater risk
to preservation of capital than our fi xed maturity investments. Recent
volatility in the equity markets has led, and may continue to lead, to
a decline in the market value of our investments in equity securities.
If treasury rates or credit spreads were to increase, the Company
may have additional realized and unrealized investment losses and
increases in other-than-temporary impairments.  e determination
that a security has incurred an other-than-temporary decline in value
requires the judgment of management. Inherently, there are risks and
uncertainties involved in making these judgments. Changes in facts,
circumstances, or critical assumptions could cause management to
conclude that further impairments have occurred.  is could lead to
additional losses on investments. For further details on net investment
losses and other-than-temporary-impairments, please see Note 5 to the
Consolidated Financial Statements included elsewhere in this report.
Derivative instruments generally present greater risk than fi xed maturity
investments or equity investments because of their greater sensitivity
to market fl uctuations. Since August 1, 2003, we have been using
derivative instruments to manage the exposure to infl ation risk created
by our preneed insurance policies that are tied to the CPI. However, the
protection provided by these derivative instruments would be limited if
there were a sharp increase in infl ation on a sustained long-term basis
which could have a material adverse eff ect on our results of operations
and fi nancial condition.
Our commercial mortgage loans and real estate investments
subject us to liquidity risk.
Our commercial mortgage loans on real estate investments (which
represented approximately 10% of the fair value of our total investments
as of December 31, 2010) are relatively illiquid. If we require extremely
large amounts of cash on short notice, we may have diffi culty selling
these investments at attractive prices and/or in a timely manner.
 e risk parameters of our investment portfolio may not
assume an appropriate level of risk, thereby reducing our
profi tability and diminishing our ability to compete and grow.
In pricing our products and services, we incorporate assumptions
regarding returns on our investments. Accordingly, our investment
decisions and objectives are a function of the underlying risks and
product profi les of each of our operating segments. If we do not assume
suffi cient risk levels in our investment portfolio, the return on our
investments may be insuffi cient to meet our pricing assumptions and
profi t targets over the long term. If, in response, we choose to increase
our product prices, our ability to compete and grow may be diminished.
Environmental liability exposure may result from our
commercial mortgage loan portfolio and real estate
investments.
Liability under environmental protection laws resulting from our
commercial mortgage loan portfolio and real estate investments may
weaken our fi nancial strength and reduce our profi tability. For more
information, please see Item 1, “Business—Regulation—Environmental
Regulation.”
Our actual claims losses may exceed our reserves for
claims, and this may require us to establish additional
reserves that may materially reduce our earnings,
profi tability and capital.
We maintain reserves to cover our estimated ultimate exposure for
claims and claim adjustment expenses with respect to reported claims
and incurred but not reported claims (“IBNR”) as of the end of each
accounting period. Reserves, whether calculated under accounting
principles generally accepted in the U.S. (“GAAP”), Statutory
Accounting Principles (“SAP”) or accounting principles required in
foreign jurisdictions, do not represent an exact calculation of exposure.
Reserving is inherently a matter of judgment; our ultimate liabilities
could exceed reserves for a variety of reasons, including changes in
macroeconomic factors (such as unemployment and interest rates),
case development and other factors. We also adjust our reserves from
time to time as these factors and our claims experience changes. Reserve
development and paid losses exceeding corresponding reserves could
have a material adverse eff ect on our earnings.
We face risks associated with our international operations.
Our international operations face political, legal, operational and other
risks that we may not face in our domestic operations. For example,
we may face the risk of restrictions on currency conversion or the
transfer of funds; burdens and costs of compliance with a variety of
foreign laws; political or economic instability in countries in which we
conduct business, including possible terrorist acts; foreign exchange
rate fl uctuations; diminished ability to legally enforce our contractual
rights; diff erences in cultural environments and unexpected changes
in regulatory requirements; exposure to local economic conditions and
restrictions on the withdrawal of non-U.S. investment and earnings; and
potentially substantial tax liabilities if we repatriate the cash generated
by our international operations back to the U.S. If our business model
is not successful in a particular country, we may lose all or most of our
investment in that country. In addition, as we engage with international
clients, we have made certain up-front commission payments, which
we may not recover if the business does not materialize as we expect.
As our international business grows, we rely increasingly on fronting
carriers or intermediaries in other countries to maintain their licenses
and product approvals, satisfy local regulatory requirements and
continue in business.
For information on the signifi cant international regulations that
apply to our Company, please see Item 1, “Business—Regulation—
International Regulation.”
Fluctuations in the exchange rate of the U.S. dollar and
other foreign currencies may materially and adversely
aff ect our results of operations.
While most of our costs and revenues are in U.S. dollars, some are in
other currencies. Because our fi nancial results in certain countries are
translated from local currency into U.S. dollars upon consolidation,
the results of our operations may be aff ected by foreign exchange rate
fl uctuations. We do not currently hedge foreign currency risk. If the
U.S. dollar weakens against the local currency, the translation of these