Assurant 2010 Annual Report Download - page 108

F-38 ASSURANT, INC.  2010 Form 10K
14 Reinsurance
Loss Protection and Capital Management
As part of the Company’s overall risk and capacity management strategy,
the Company purchases reinsurance for certain risks underwritten by
the Company’s various segments, including signifi cant individual or
catastrophic claims.
For those product lines where there is exposure to losses from catastrophe
events, the Company closely monitors and manages its aggregate risk
exposure by geographic area.  e Company has entered into reinsurance
treaties to manage exposure to these types of events.
On May 5, 2009, the Company announced the establishment of a
multi-year catastrophe bond program to provide reinsurance protection
for losses resulting from hurricanes. As part of the program, certain
of the Company’s subsidiaries (the “Subsidiaries”) entered into two
reinsurance agreements with Ibis Re Ltd., an independent special
purpose reinsurance company domiciled in the Cayman Islands (“Ibis
Re”).  e Ibis Re agreements provide up to $150,000 of reinsurance
coverage for protection against losses over a three-year period from
individual hurricane events in Hawaii and along the Gulf and Eastern
Coasts of the United States.  e agreements expire in May 2012. Ibis
Re fi nanced the property catastrophe reinsurance coverage by issuing
catastrophe bonds in an aggregate amount of $150,000 to unrelated
investors (the “Series 2009-1 Notes”).
On April 27, 2010, the Subsidiaries entered into two additional
reinsurance agreements with Ibis Re providing up to $150,000 of
reinsurance coverage for protection against losses over a three-year
period from individual hurricane events in Hawaii and along the
Gulf and Eastern Coasts of the United States.  e agreements expire
in May 2013. Ibis Re fi nanced the property catastrophe reinsurance
coverage by issuing catastrophe bonds in an aggregate amount of
$150,000 to unrelated investors (the “Series 2010-1 Notes”).
 e $300,000 of fully collateralized hurricane coverage, purchased
from Ibis Re provides per occurrence fi rst event coverage as part of the
Company’s catastrophe program.  is $300,000 of coverage represents
approximately 26.5% of the $1,130,000 of fi rst event coverage (net of
reimbursements of the Florida Hurricane Catastrophe Fund) purchased
by the Company in excess of the Company’s $155,000 retention.  e
coverage is expected to provide protection for a storm that generates in
excess of approximately $450,000 of losses net of any reimbursements
from the Florida Hurricane Catastrophe Fund.
Under the terms of these reinsurance agreements, the Subsidiaries
are obligated to pay annual reinsurance premiums to Ibis Re for the
reinsurance coverage.  e reinsurance agreements with Ibis Re utilize
a dual trigger that is based upon an index that is created by applying
predetermined percentages to insured industry losses in each state in the
covered area as reported by an independent party and the Subsidiaries’
covered losses incurred. Reinsurance contracts that have a separate,
pre-identifi ed variable (e.g., a loss-based index) are accounted for as
reinsurance if certain conditions are met. In the case of the reinsurance
agreements with Ibis Re, these conditions were met, thus the Company
accounted for them as reinsurance in accordance with the guidance
for reinsurance contracts.
Amounts payable to the Subsidiaries under the reinsurance agreements
will be determined by the index-based losses, which are designed to
approximate the Subsidiaries’ actual losses from any covered event.
 e amount of actual losses and index losses from any covered event
may diff er. For each covered event, Ibis Re pays the Subsidiaries the
lesser of the covered index-based losses or the Subsidiaries’ actual losses.
 e principal amount of the catastrophe bonds will be reduced by any
amounts paid to the Subsidiaries under the reinsurance agreements.
 e Subsidiaries have not incurred any losses subject to the reinsurance
agreements since their inception.
As with any reinsurance agreement, there is credit risk associated with
collecting amounts due from reinsurers. In connection with the issuance
of the Series 2009-1 Notes, Ibis Re set up two reinsurance trusts to
hold certain investments to secure payments to the Subsidiaries under
the reinsurance agreements and the repayment of principal to the
bondholders, as applicable, and entered into two related total return
swap agreements (each a “swap”) with Goldman Sachs International
(the “Swap Counterparty”).  e Swaps may be terminated as a result
of certain events, including but not limited to a payment default by
the Swap Counterparty, the insolvency of the Swap Counterparty,
certain changes in law with regard to the Swap Counterparty, or certain
merger transactions involving the Swap Counterparty (each a “Swap
Counterparty Event”). In the event of such termination, the Company
may elect either to replace the Swap Counterparty and enter into an
interim swap agreement (the “Interim Swap Agreement”), acting as
an interim swap counterparty opposite Ibis Re, or to appoint another
swap counterparty to replace the Swap Counterparty. Following a
termination of a Swap as the result of a Swap Counterparty Event,
if either the Company or a designated affi liate does not upon two
business days notice indicate its intention to enter into the Interim
Swap Agreement with Ibis Re or appoint another swap counterparty
to replace the Swap Counterparty, then the related class of Cat Bond
will be subject to early redemption on the next following quarterly
payment date for such Cat Bond.
With regard to the Series 2010-1 Notes, the credit risk is mitigated
by two reinsurance trust accounts. Each reinsurance trust account has
been funded by Ibis Re 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.  e money market funds must
have a principal stability rating of at least AAA by Standard & Poor’s.
At the time the agreements were entered into with Ibis Re, the Company
evaluated the applicability of the accounting guidance that addresses
variable interest entities (“VIEs”). Entities which do not have suffi cient
equity at risk to allow the entity to fi nance its activities without
additional fi nancial support or in which the equity investors, as a
group, do not have the characteristic of a controlling fi nancial interest
are referred to as VIEs. A VIE is consolidated by the variable interest
holder that is determined to have the controlling fi nancial interest
(primary benefi ciary) as a result of having both the power to direct the
activities of a VIE that most signifi cantly impact the VIE’s economic
performance and the obligation to absorb losses or right to receive
benefi ts from the VIE that could potentially be signifi cant to the
VIE.  e Company determines whether it is the primary benefi ciary
of an entity subject to consolidation based on a qualitative assessment
of the VIE’s capital structure, contractual terms, nature of the VIE’s
operations and purpose and the Company’s relative exposure to the
related risks of the VIE on the date it becomes initially involved in
the VIE.  e Company reassesses it’s VIE determination with respect
to an entity on an ongoing basis.
As a result of the evaluation of the reinsurance agreements with Ibis Re,
the Company concluded that Ibis Re is a VIE. However, while Ibis Re
is a VIE, the Company concluded that it does not have a signifi cant
variable interest in Ibis Re as the variability in Ibis Re’s 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.