Assurant 2014 Annual Report Download - page 131

ASSURANT, INC. – 2014 Form 10-K F-43
14 Reinsurance
covered event, Ibis Re II pays the Subsidiaries the lesser of
the covered index-based losses or the Subsidiaries’ actual
losses. The principal amount of the catastrophe bonds will
be reduced by any amounts paid to the Subsidiaries under
the reinsurance agreements. The Subsidiaries have not
incurred any losses subject to the reinsurance agreements
since their inception.
As of December 31, 2014, the Company had not ceded any
losses to Ibis Re II.
As with any reinsurance agreement, there is credit risk
associated with collecting amounts due from reinsurers. With
regard to the Series 2012-1 Notes and Series 2013-1 Notes,
the credit risk is mitigated by two reinsurance trust accounts
for each Series, respectively. Each reinsurance trust account
has been funded by Ibis Re II with money market funds that
invest solely in direct government obligations backed by the
U.S. government with maturities of no more than 13 months.
The money market funds must have a principal stability rating
of at least AAA by Standard & Poor’s.
As a result of the evaluation of the reinsurance agreements
with Ibis Re II, the Company concluded that Ibis Re II is a VIE.
However, while Ibis Re II is a VIE, the Company concluded that
it does not have a signifi cant variable interest in Ibis Re II as the
variability in results, caused by the reinsurance agreements, is
expected to be absorbed entirely by the bondholders and the
Company is not entitled to any residual amounts. Accordingly, the
Company is not the primary benefi ciary of Ibis Re II and does not
consolidate the entities in the Company’s fi nancial statements.
Business Divestitures
The Company has used reinsurance to exit certain businesses,
such as the disposals of FFG and LTC. Reinsurance was used
in these cases to facilitate the transactions because the
businesses shared legal entities with operating segments
that the Company retained. Assets supporting liabilities
ceded relating to these businesses are mainly held in trusts
and the separate accounts relating to FFG are still refl ected
in the Company’s balance sheet.
If the reinsurers became insolvent, we would be exposed
to the risk that the assets in the trusts and/or the separate
accounts would be insuffi cient to support the liabilities
that would revert back to us. The reinsurance recoverable
from The Hartford was $1,077,791 and $1,101,847 as of
December 31, 2014 and 2013, respectively. The reinsurance
recoverable from John Hancock was $3,471,908 and $2,578,329
as of December 31, 2014 and 2013, respectively.
The reinsurance agreement associated with the FFG sale also
stipulates that The Hartford contribute funds to increase the
value of the separate account assets relating to Modifi ed
Guaranteed Annuity business sold if such value declines below
the value of the associated liabilities. If The Hartford fails
to fulfi ll these obligations, the Company will be obligated
to make these payments.
In addition, the Company would be responsible for
administering this business in the event of reinsurer insolvency.
We do not currently have the administrative systems and
capabilities to process this business. Accordingly, we would
need to obtain those capabilities in the event of an insolvency
of one or more of the reinsurers of these businesses. We
might be forced to obtain such capabilities on unfavorable
terms with a resulting material adverse effect on our results
of operations and fi nancial condition.
As of December 31, 2014, we were not aware of any regulatory
actions taken with respect to the solvency of the insurance
subsidiaries of The Hartford or John Hancock that reinsure
the FFG and LTC businesses, and the Company has not been
obligated to fulfi ll any of such reinsurers’ obligations.
John Hancock and The Hartford have paid their obligations
when due and there have been no disputes.
Segment Client Risk and Profi t Sharing
The Assurant Solutions and Assurant Specialty Property
segments write business produced by their clients, such as
mobile providers, mortgage lenders and servicers, fi nancial
institutions and reinsures all or a portion of such business to
insurance subsidiaries of some clients. Such arrangements
allow signifi cant fl exibility in structuring the sharing of risks
and profi ts on the underlying business.
A substantial portion of Assurant Solutions and Assurant Specialty
Property’s reinsurance activities are related to agreements to
reinsure premiums and risks related to business generated by
certain clients to the clients’ own captive insurance companies
or to reinsurance subsidiaries in which the clients have an
ownership interest. Through these arrangements, our insurance
subsidiaries share some of the premiums and risk related
to client-generated business with these clients. When the
reinsurance companies are not authorized to do business in
our insurance subsidiary’s domiciliary state, the Company’s
insurance subsidiary generally obtains collateral, such as a
trust or a letter of credit, from the reinsurance company or
its affi liate in an amount equal to the outstanding reserves to
obtain full statutory fi nancial credit in the domiciliary state
for the reinsurance.
The Company’s reinsurance agreements do not relieve the
Company from its direct obligation to its insureds. Thus, a credit
exposure exists to the extent that any reinsurer is unable to
meet the obligations assumed in the reinsurance agreements. To
mitigate its exposure to reinsurance insolvencies, the Company
evaluates the fi nancial condition of its reinsurers and holds
substantial collateral (in the form of funds, trusts, and letters
of credit) as security under the reinsurance agreements.