Assurant 2012 Annual Report Download - page 26

ASSURANT, INC.2012 Form10-K18
PARTI
ITEM 1A Risk Factors
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, 2012,  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, 2012 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, 2012).
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.
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.  e protection
provided by these derivative instruments begins at higher levels of
in ation. However, exposure can still exist due to potential di erences
in the amount of business and the notional amount of the protection.
 is 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 10% of the fair value of our total investments
as of December31, 2012) 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.
 e risk parameters of our investment portfolio may not
assume an appropriate level of risk, thereby reducing
ourpro tability and diminishing our ability to compete
and grow.
In pricing our products and services, we incorporate assumptions
regarding returns on our investments. Accordingly, our investment
decisions and objectives are a function of the underlying risks and
product pro les of each of our operating segments. Market conditions
may not allow us to invest in assets with su ciently high returns to
meet our pricing assumptions and pro t targets over the long term.
If, in response, we choose to increase our product prices, our ability
to compete and grow may be diminished.
Environmental liability exposure may result from
ourcommercial mortgage loan portfolio and real estate
investments.
Liability under environmental protection laws resulting from our commercial
mortgage loan portfolio and real estate investments may weaken our
 nancial strength and reduce our pro tability. For more information,
please see Item1, “Business—Regulation—Environmental Regulation.”
We face risks associated with our international operations.
Our international operations face political, legal, operational and other
risks that we may not face in our domestic operations. For example,
we may face the risk of restrictions on currency conversion or the
transfer of funds; burdens and costs of compliance with a variety of
foreign laws; political or economic instability in countries in which we
conduct business, including possible terrorist acts; foreign exchange
rate  uctuations; diminished ability to legally enforce our contractual
rights; di erences in cultural environments and unexpected changes in
regulatory requirements, including changes in regulatory treatment of
certain products; exposure to local economic conditions and restrictions
on the withdrawal of non-U.S. investment and earnings; and potentially
substantial tax liabilities if we repatriate the cash generated by our
international operations back to the U.S. If our business model is
not successful in a particular country, we may lose all or most of