Assurant 2013 Annual Report Download - page 33

ASSURANT, INC. – 2013 Form 10-K 21
PART I
ITEM 1A Risk Factors
Acquired businesses and new ventures may not provide us with
the benefi ts that we anticipate. Acquisitions entail a number
of risks including, among other things, inaccurate assessment
of liabilities; diffi culties in realizing projected effi ciencies,
synergies and cost savings; diffi culties in integrating systems and
personnel; failure to achieve anticipated revenues, earnings or
cash fl ow; an increase in our indebtedness; and a limitation in
our ability to access additional capital when needed. Our failure
to adequately address these acquisition risks could materially
adversely affect our results of operations and fi nancial condition.
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. The value of our investments
may be materially adversely affected 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 fi xed maturity security
is subject to impairment based on the creditworthiness
of a given issuer. As of December 31, 2013, fi xed maturity
securities represented 78% of the fair value of our total
invested assets. Our fi xed maturity portfolio also includes
below investment grade securities (rated “BB” or lower by
nationally recognized statistical rating organizations). These
investments comprise approximately 5% of the fair value of
our total investments as of December 31, 2013 and generally
provide higher expected returns but present greater risk
and can be less liquid than investment grade securities. A
signifi cant increase in defaults and impairments on our fi xed
maturity investment portfolio could materially adversely
affect our results of operations and fi nancial condition. See
“Item 7A—Quantitative and Qualitative Disclosures About
Market Risk—Credit Risk” for additional information on the
composition of our fi 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, 2013). 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 fi 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.
The 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. This 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
fi xed maturity investments or equity investments because
of their greater sensitivity to market fl uctuations. Since
August 1, 2003, we have been using derivative instruments to
manage the exposure to infl ation risk created by our preneed
insurance policies that are tied to the CPI. The protection
provided by these derivative instruments begins at higher
levels of infl ation. However, exposure can still exist due to
potential differences in the amount of business and the notional
amount of the protection. This could have a material adverse
effect on our results of operations and fi 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, 2013) are relatively
illiquid. If we require extremely large amounts of cash on
short notice, we may have diffi culty selling these investments
at attractive prices and in a timely manner.
The risk parameters of our investment
portfolio may not assume an appropriate level
of risk, thereby reducing our profi 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 profi les of each of our
operating segments. Market conditions may not allow us to
invest in assets with suffi ciently high returns to meet our
pricing assumptions and profi 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 fi nancial strength and reduce
our profi tability. For more information, please see Item 1,
“Business—Regulation—Environmental Regulation.”