Assurant 2011 Annual Report Download - page 66

ASSURANT, INC.2011 Form10-K58
PARTII
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
In ation risk is the possibility that a change in domestic price levels
produces an adverse e ect on earnings.  is typically happens when
either invested assets or liabilities, but not both is indexed to in ation.
Foreign exchange risk is the possibility that changes in exchange rates
produce an adverse e ect on earnings and equity when measured in
domestic currency.  is risk is largest when assets backing liabilities
payable in one currency are invested in  nancial instruments of another
currency. Our general principle is to invest in assets that match the
currency in which we expect the liabilities to be paid.
Interest Rate Risk
Interest rate risk arises as we invest substantial funds in interest-sensitive
 xed income assets, such as  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  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 is primarily
associated with the need to reinvest cash  ows (primarily coupons
and maturities) in an unfavorable lower interest rate environment.
In addition, for securities with embedded options such as callable
bonds, mortgage-backed securities, and certain asset-backed securities,
reinvestment risk occurs when  uctuations in interest rates have a
direct impact on expected cash  ows. As interest rates fall, an increase
in prepayments on these assets results in earlier than expected receipt
of cash  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  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 out 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  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 di 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,2011 -100 -50 0 50 100
Total market value $ 12,030,637 $ 11,609,913 $ 11,192,599 $ 10,784,614 $ 10,398,982
% Change in market value from base case 7.49% 3.73% — % (3.65)% (7.09)%
$ Change in market value from base case $ 838,038 $ 417,314 $ — $ (407,985) $ (793,617)
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)
 e interest rate sensitivity relating to reinvestment risk of our  xed maturity securities is assessed using hypothetical scenarios that assume
purchases in the primary market and considers the e ects of interest rates on sales.  e e ects of embedded options including call or put features
are not considered. Our actual results may di er from the results noted below particularly due to assumptions utilized or if events occur that
were not included in the methodology.