Assurant 2015 Annual Report Download - page 76

64 ASSURANT, INC. – 2015 Form 10-K
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�”
We had $7,470,403 and $7,254,585 of reinsurance recoverables
as of December 31, 2015 and 2014, 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 $1,053,496
and $3,553,560 as of December 31, 2015 and $1,077,791 and
$3,471,908 as of December 31, 2014, relating to two large
coinsurance arrangements with The Hartford and John Hancock
(a subsidiary of Manulife Financial Corporation), respectively,
related to sales of businesses are backed by trusts� If the
value of the assets in these trusts falls below the value of
the associated liabilities, The 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 The Hartford and John Hancock, whose A�M� Best ratings
are currently A- and A+, respectively� A�M� Best currently
maintains a stable outlook on the nancial strength ratings of
both The Hartford and John Hancock� 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�
In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
5% of Assurant preneed insurance policies, with reserves of
$254,083 and $268,161 as of December 31, 2015 and 2014,
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, 2015 and 2014, respectively�
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 entered into forward exchange contracts to hedge
exposures denominated in the Euro�
The foreign exchange risk sensitivity of our xed maturity securities denominated in Canadian dollars, whose balance was
$1,413,580 and $1,590,224 of the total as of December 31, 2015 and 2014, 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, 2015
Foreign exchange spot rate at December 31,
2015, US Dollar to Canadian Dollar -10%
-5% 0 5% 10%
Total market value $ 10,073,975 $ 10,144,651 $ 10,215,328 $ 10,286,005 $ 10,356,681
% change of market value from base case (1�38)% (0�69)% —% 0�69% 1�38%
$ change of market value from base case $ (141,353) $ (70,677) $ — $ 70,677 $ 141,353