Assurant 2012 Annual Report Download - page 25

ASSURANT, INC.2012 Form10-K 17
PARTI
ITEM 1A Risk Factors
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, pro 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 signi cantly and adversely a ect our access to capital
and our ability to pay our debts or expenses.
In previous 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,
a ectingourpro tability and  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 a 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, 2012.
 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 consolidated
balance sheets.  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 decrease the net
unrealized gains 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