Assurant 2011 Annual Report Download - page 25

ASSURANT, INC.2011 Form10-K 17
PARTI
ITEM 1A Risk Factors
 e fair market value of the  xed maturity securities in our portfolio
and the investment income from these securities  uctuate depending
on general economic and market conditions. Because all of our  xed
maturity securities are classi ed as available for sale, changes in the
market value of these securities are re ected in our balance sheet.
 eir fair market value generally increases or decreases in an inverse
relationship with  uctuations in interest rates, while net investment
income from  xed-maturity investments increases or decreases directly
with interest rates. In addition, actual net investment income and/
or cash  ows from investments that carry prepayment risk, such as
mortgage-backed and other asset-backed securities, may di er from
those anticipated at the time of investment as a result of interest rate
 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
e ects of interest rate volatility and to increase the likelihood that cash
 ows are available to pay claims as they become due. Our asset/liability
management strategies may fail to eliminate or reduce the adverse
e ects of interest rate volatility, and signi cant  uctuations in the level
of interest rates may have a material adverse e ect on our results of
operations and  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 signi cant loss
to pay claims and policyholder bene ts.
Our preneed insurance policies are generally whole life insurance policies
with increasing death bene ts. In extended periods of declining interest
rates or rising in ation, there may be compression in the spread between
the death bene 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 in ation rates may have a material
adverse e ect on our results of operations and our overall  nancial
condition. See “Item7A—Quantitative and Qualitative Disclosures
About Market Risk—In ation Risk” for additional information.
Assurant Employee Bene 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 speci 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 Bene ts would need
to be calculated using lower discount rates, thereby increasing the net
present value of those claims and the required reserves. Depending
on the magnitude of the decline, such changes could have a material
adverse e ect on our results of operations and  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 a 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  xed maturity security is subject
to impairment based on the creditworthiness of a given issuer. As of
December31,2011,  xed maturity securities represented 80% of the
fair value of our total invested assets. Our  xed maturity portfolio also
includes below investment grade securities (rated “BB” or lower by
nationally recognized securities rating organizations).  ese investments
comprise approximately 6% of the fair value of our total investments as
of December31,2011 and generally provide higher expected returns,
but present greater risk and can be less liquid than investment grade
securities. A signi cant increase in defaults and impairments on our
 xed maturity investment portfolio could materially adversely a ect
our results of operations and  nancial condition. See “Item7A—
Quantitative and Qualitative Disclosures About Market Risk—Credit
Risk” for additional information on the composition of our  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,2011).
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  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4 to the
Consolidated Financial Statements included elsewhere in this report.
Derivative instruments generally present greater risk than  xed maturity
investments or equity investments because of their greater sensitivity
to market  uctuations. Since August1,2003, we have been using
derivative instruments to manage the exposure to in 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 in ation on a sustained long-term basis
which could have a material adverse e ect on our results of operations
and  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 9% of the fair value of our total investments
as of December31,2011) are relatively illiquid. If we require extremely
large amounts of cash on short notice, we may have di culty selling
these investments at attractive prices and/or in a timely manner.