Assurant 2010 Annual Report Download - page 61

55ASSURANT, INC.  2010 Form 10K
PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Interest rate risk arises as we invest substantial funds in interest-sensitive
fi xed income assets, such as fi xed maturity securities, mortgage-backed and
asset-backed securities and commercial mortgage loans, primarily in the
United States and Canada.  ere are two forms of interest rate risk—price
risk and reinvestment risk. Price risk occurs when fl uctuations in interest
rates have a direct impact on the market valuation of these investments.
As interest rates rise, the market value of these investments falls, and
conversely, as interest rates fall, the market value of these investments
rise. Reinvestment risk occurs when fl uctuations in interest rates have a
direct impact on expected cash fl ows from mortgage-backed and asset-
backed securities. As interest rates fall, an increase in prepayments on these
assets results in earlier than expected receipt of cash fl ows forcing us to
reinvest the proceeds in an unfavorable lower interest rate environment.
Conversely, as interest rates rise, a decrease in prepayments on these assets
results in later than expected receipt of cash fl ows forcing us to forgo
reinvesting in a favorable higher interest rate environment.
We manage interest rate risk by selecting investments with characteristics
such as duration, yield, currency and liquidity tailored to the anticipated
cash outfl ow characteristics of our insurance and reinsurance liabilities.
Our group long-term disability reserves are also sensitive to interest
rates. Group long-term disability and group term life waiver of premium
reserves are discounted to the valuation date at the valuation interest rate.
 e valuation interest rate is determined by taking into consideration
actual and expected earned rates on our asset portfolio.
 e interest rate sensitivity relating to price risk of our fi xed maturity
securities is assessed using hypothetical scenarios that assume several
positive and negative parallel shifts of the yield curves. We have assumed
that the United States and Canadian yield curve shifts are of equal
direction and magnitude.  e individual securities are repriced under
each scenario using a valuation model. For investments such as callable
bonds and mortgage-backed and asset-backed securities, a prepayment
model was used in conjunction with a valuation model. Our actual
experience may diff er from the results noted below particularly due to
assumptions utilized or if events occur that were not included in the
methodology.  e following tables summarize the results of this analysis
for bonds, mortgage-backed and asset-backed securities held in our
investment portfolio as of the dates indicated:
INTEREST RATE MOVEMENT ANALYSIS OF MARKET VALUE OF FIXED MATURITY SECURITIES INVESTMENT PORTFOLIO
As of December 31, 2010 -100 -50 0 50 100
Total market value $ 11,388,823 $ 10,995,378 $ 10,612,552 $ 10,246,251 $ 9,900,718
% Change in market value from base case 7.31 % 3.61 % — % (3.45)% (6.71)%
$ Change in market value from base case $ 776,271 $ 382,826 $ — $ (366,301) $ (711,834)
As of December 31, 2009 -100 -50 0 50 100
Total market value $ 10,680,018 $ 10,316,329 $ 9,966,772 $ 9,632,477 $ 9,315,290
% Change in market value from base case 7.16 % 3.51 % — % (3.35)% (6.45)%
$ Change in market value from base case $ 713,246 $ 349,557 $ — $ (334,295) $ (651,482)
 e interest rate sensitivity relating to reinvestment risk of our fi xed
maturity securities is assessed using hypothetical scenarios that assume
purchases in the primary market and considers the eff ects of interest
rates on sales.  e eff ects of embedded options including call or put
features are not considered. Our actual results may diff er from the
results noted below particularly due to assumptions utilized or if events
occur that were not included in the methodology.
 e following tables summarize the results of this analysis on our reported portfolio yield as of the dates indicated:
INTEREST RATE MOVEMENT ANALYSIS OF PORTFOLIO YIELD OF FIXED MATURITY SECURITIES INVESTMENT PORTFOLIO
As of December 31, 2010 -100 -50 0 50 100
Portfolio yield 5.63 % 5.69 % 5.76 % 5.83 % 5.89 %
Basis point change in portfolio yield (0.13)% (0.07)% — % 0.07 % 0.13 %
As of December 31, 2009 -100 -50 0 50 100
Portfolio yield 5.80 % 5.85 % 5.89 % 5.93 % 5.98 %
Basis point change in portfolio yield (0.09)% (0.04)% — % 0.04 % 0.09 %
Credit Risk
We have exposure to credit risk primarily from customers, as a holder
of fi xed maturity securities and by entering into reinsurance cessions.
Our risk management strategy and investment policy is to invest in
debt instruments of high credit quality issuers and to limit the amount
of credit exposure with respect to any one issuer. We attempt to limit
our credit exposure by imposing fi xed maturity portfolio limits on
individual issuers based upon credit quality. Currently our portfolio
limits are 1.5% for issuers rated AA- and above, 1% for issuers rated
A- to A+, 0.75% for issuers rated BBB- to BBB+ and 0.38% for
issuers rated BB- to BB+.  ese portfolio limits are further reduced
for certain issuers with whom we have credit exposure on reinsurance
agreements. We use the lower of Moody’s or S&P’s ratings to determine
an issuer’s rating.