Assurant 2011 Annual Report Download - page 24

ASSURANT, INC.2011 Form10-K16
PARTI
ITEM 1A Risk Factors
a negative outlook on our life and health insurance subsidiaries, as well
as our senior debt rating, primarily citing the adverse consequences of
the A ordable Care Act on our life and health insurance subsidiaries.
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 a ect the demand for our products
from intermediaries and consumers, and materially adversely a ect
our results. In addition, any reduction in our  nancial strength ratings
could materially adversely a ect our cost of borrowing.
As of December31,2011, contracts representing approximately 17% of
Assurant Solutions’ and 26% of Assurant Specialty Property’s net earned
premiums and fee income contain provisions requiring the applicable
subsidiaries to maintain minimum A.M. Best  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  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 Bene ts’ net earned premiums
for the year ended December31,2011 contain provisions requiring
the applicable subsidiaries to maintain minimum A.M. Best  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 18%
of Assurant Health’s earned premiums gross of rebates for the year
ended December31,2011 contain provisions requiring the applicable
subsidiaries to maintain minimum A.M. Best  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 a ect
our results of operations and  nancial condition.
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 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 e ect on our earnings.
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.
In recent years, the global capital and credit markets experienced extreme
volatility and disruption. In many cases, companies’ ability to raise
money was severely restricted. Although conditions in the capital and
credit markets have improved signi cantly, they could again deteriorate.
Our ability to borrow or raise money is important if our operating cash
 ow is insu 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  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 pro tability and reducing our  nancial
 exibility. Our results of operations,  nancial condition, cash  ows
and statutory capital position could be materially and adversely a 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 pro tability. Signi cant
 uctuations in the  xed maturity market could impair our pro tability,
 nancial condition and/or cash  ows. Our investments are subject
to market-wide risks and  uctuations, as well as to risks inherent in
particular securities. In addition, certain factors a 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.”
Market conditions, changes in interest rates, and prolonged
periods of low interest rates may materially aff ect our results.
Recent periods have been characterized by low interest rates. A prolonged
period during which interest rates remain at historically low levels may
result in lower-than-expected net investment income and larger required
reserve increases. In addition, certain statutory capital requirements
are based on formulas or models that consider interest rates, and a
prolonged period of low interest rates may increase the statutory capital
we are required to hold.
Changes in interest rates may materially adversely a ect the performance
of some of our investments. Interest rate volatility may 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 83% of the fair value of our total
investments as of December31,2011.