Assurant 2010 Annual Report Download - page 35

29ASSURANT, INC.  2010 Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Factors Aff ecting Results
Our results depend on the appropriateness of our product pricing
and underwriting, the accuracy of the reserves we establish for future
policyholder benefi ts and claims, returns on invested assets and our ability
to manage our expenses.  erefore, factors aff ecting these items may
have a material adverse eff ect on our results of operations or fi nancial
condition. For a listing of those factors see “Item 1A—Risk Factors.”
Revenues
We generate revenues primarily from the sale of our insurance policies
and service contracts and from investment income earned on our
investments. Sales of insurance policies are recognized in revenue as
earned premiums while sales of administrative services are recognized
as fee income.
Eff ective January 1, 2009, new preneed life insurance policies in
which death benefi t increases are determined at the discretion of
the Company are accounted for as universal life contracts under the
universal life insurance accounting guidance. For contracts sold prior
to January 1, 2009, these types of preneed life insurance sales were
accounted for and will continue to be accounted for under limited
pay insurance guidance.  e change from reporting certain preneed
life insurance policies in accordance with the universal life insurance
guidance versus the limited pay insurance guidance is not material to
the consolidated statement of operations or balance sheets.
Under the universal life insurance guidance, income earned on new
preneed life insurance policies is presented within policy fee income
net of policyholder benefi ts. Under the limited pay insurance guidance,
the consideration received on preneed policies is presented separately
as net earned premiums, with policyholder benefi ts expense being
shown separately.
Our premium and fee income is supplemented by income earned from
our investment portfolio. We recognize revenue from interest payments,
dividends and sales of investments. Currently, our investment portfolio is
primarily invested in fi xed maturity securities. Both investment income
and realized capital gains on these investments can be signifi cantly
aff ected by changes in interest rates.
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. Fluctuations in interest rates aff ect our returns on,
and the market value of, fi xed maturity and short-term investments.
Beginning January 1, 2011, Assurant Health will be required to start
accruing for rebates to customers if the minimum loss ratio for some
of its products is less than 80%.  e rebate accrual will be refl ected as
a reduction to net earned premiums in the Statement of Operations.
 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.  e fair market value generally
increases or decreases in an inverse relationship with fl uctuations in
interest rates, while net investment income realized by us from future
investments in fi xed maturity securities will generally increase or decrease
with interest rates. We also have investments that carry pre-payment
risk, such as mortgage-backed and asset-backed securities. Interest rate
fl uctuations may cause actual net investment income and/or cash fl ows
from such investments to diff er from estimates made at the time of
investment. In periods of declining interest rates, mortgage prepayments
generally increase and mortgage-backed securities, commercial mortgage
obligations and bonds are more likely to be prepaid or redeemed as
borrowers seek to borrow at lower interest rates.  erefore, in these
circumstances we may be required to reinvest those funds in lower-
interest investments.
Expenses
Our expenses are primarily policyholder benefi ts, selling, underwriting
and general expenses and interest expense.
Policyholder benefi ts are aff ected by our claims management programs,
reinsurance coverage, contractual terms and conditions, regulatory
requirements, economic conditions, and numerous other factors.
Benefi ts paid could substantially exceed our expectations, causing
a material adverse eff ect on our business, results of operations and
fi nancial condition.
Selling, underwriting and general expenses consist primarily of
commissions, premium taxes, licenses, fees, amortization of deferred
costs, general operating expenses and income taxes.
We incur interest related expenses related to our debt and mandatorily
redeemable preferred stock.
Critical Accounting Estimates
Certain items in our consolidated fi nancial statements are based on
estimates and judgment. Diff erences between actual results and these
estimates could in some cases have material impacts on our consolidated
fi nancial statements.
 e following critical accounting policies require signifi cant estimates.
 e actual amounts realized in these areas could ultimately be materially
diff erent from the amounts currently provided for in our consolidated
fi nancial statements.
Reserves
Reserves are established in accordance with GAAP using generally
accepted actuarial methods and refl ect judgments about expected
future claim payments. Calculations incorporate assumptions about
infl ation rates, the incidence of incurred claims, the extent to which all
claims have been reported, future claims processing, lags and expenses
and future investment earnings, and numerous other factors. While
the methods of making such estimates and establishing the related
liabilities are periodically reviewed and updated, the calculation of
reserves is not an exact process.