Assurant 2012 Annual Report Download - page 67

ASSURANT, INC.2012 Form10-K 59
PARTII
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
We are also exposed to the credit risk of our reinsurers. When we reinsure,
we are still liable to our insureds regardless of whether we get reimbursed
by our reinsurer. As part of our overall risk and capacity management
strategy, we purchase reinsurance for certain risks underwritten by
our various business segments as described above under “Item 7—
Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Reinsurance.”
 e Company had $6,141,737 and $5,411,064 of reinsurance
recoverables as of December31, 2012 and 2011, respectively, the
majority of which are protected from credit risk by various types of risk
mitigation mechanisms such as trusts, letters of credit or by withholding
the assets in a modi ed coinsurance or co-funds-withheld arrangement.
For example, reserves of $1,125,472 and $2,494,275 as of December31,
2012 and $1,153,681 and $2,471,225 as of December31, 2011, relating
to two large coinsurance arrangements with  e Hartford and John
Hancock (a subsidiary of Manulife Financial Corporation), respectively,
related to sales of businesses are held in trusts. If the value of the assets
in these trusts falls below the value of the associated liabilities,  e
Hartford and John Hancock, as the case may be, will be required to
put more assets in the trusts. We may be dependent on the  nancial
condition of  e Hartford and John Hancock, whose A.M. Best ratings
are currently A and A+, respectively. As of December31, 2012, A.M.
Best maintained a stable outlook on the  nancial strength ratings of
John Hancock.  e Hartford’s A.M. Best ratings are under review with
negative implications. For recoverables that are not protected by these
mechanisms, we are dependent solely on the credit of the reinsurer. See
“Item1A—Risk Factors—Risks Related to Our Company—Reinsurance
may not be available or adequate to protect us against losses, and we are
subject to the credit risk of reinsurers” and “—We have sold businesses
through reinsurance that could again become our direct  nancial and
administrative responsibility if the purchasing companies were to
become insolvent.” A majority of our reinsurance exposure has been
ceded to companies rated A- or better by A.M. Best.
Infl ation Risk
In ation risk arises as we invest in assets, which are not indexed to the
level of in ation, whereas the corresponding liabilities are indexed to
the level of in ation. Approximately 7% of Assurant preneed insurance
policies, with reserves of $303,652 and $300,548 as of December31,
2012 and 2011, respectively, have death bene ts that are guaranteed to
grow with the CPI. In times of rapidly rising in ation, the credited death
bene t growth on these liabilities increases relative to the investment
income earned on the nominal assets resulting in an adverse impact on
earnings. We have partially mitigated this risk by purchasing derivative
contracts with payments tied to the CPI. See “—Derivatives.”
In addition, we have in ation risk in our individual and small employer
group health insurance businesses to the extent that medical costs
increase with in ation, and we have not been able to increase premiums
to keep pace with in ation.
Foreign Exchange Risk
We are exposed to foreign exchange risk arising from our international
operations, mainly in Canada. We also have foreign exchange risk
exposure to the British pound, Brazilian Real, Euro, Mexican Peso
and Argentine Peso. Total invested assets denominated in currencies
other than the Canadian dollar were approximately 2% of our total
invested assets at December31, 2012 and 2011.
Foreign exchange risk is mitigated by matching our liabilities under
insurance policies that are payable in foreign currencies with investments
that are denominated in such currency. We have not established any
hedge to our foreign currency exchange rate exposure.
 e foreign exchange risk sensitivity of our  xed maturity securities
denominated in Canadian dollars, whose balance was $1,656,511
and $1,518,295 of the total as of December31, 2012 and 2011,
respectively, on our entire  xed maturity portfolio is summarized in
the following tables:
FOREIGN EXCHANGE MOVEMENT ANALYSIS OF MARKET VALUE OF FIXED MATURITY SECURITIES ASSETS
As of December31, 2012
Foreign exchange spot rate at December31,2012,
USDollartoCanadianDollar -10%
-5% 05% 10%
Total market value $ 12,005,979 $ 12,088,809 $ 12,171,638 $ 12,254,467 $ 12,337,297
% change of market value from basecase (1.36)% (0.68)% 0 0.68% 1.36%
$ change of market value from basecase $ (165,659) $ (82,829) $ 0 $ 82,829 $ 165,659
As of December31, 2011
Foreign exchange spot rate at December31, 2011,
US Dollar to Canadian Dollar -10%
-5% 05% 10%
Total market value $ 11,040,764 $ 11,116,682 $ 11,192,599 $ 11,268,516 $ 11,344,434
% change of market value from basecase (1.36)% (0.68)% 0 0.68% 1.36%
$ change of market value from basecase $ (151,835) $ (75,917) $ 0 $ 75,917 $ 151,835