Assurant 2011 Annual Report Download - page 114

ASSURANT, INC.2011 Form10-KF-38
13 Reinsurance
 e Company had $1,014,164 and $1,190,763, respectively, of
invested assets held in trusts or by custodians as of December31,
2011 and 2010, respectively, for the bene t of others related to certain
reinsurance arrangements.
 e Company utilizes ceded reinsurance for loss protection and capital
management, business dispositions, and in the Assurant Solutions and
Assurant Specialty Property segments, for client risk and pro t sharing.
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 signi 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, 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  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  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  rst event coverage as part of the
Company’s catastrophe program.  is $300,000 of coverage represents
approximately 22.9% of the $1,310,000 of  rst event coverage (net of
reimbursements of the Florida Hurricane Catastrophe Fund) purchased
by the Company in excess of the Company’s $190,000 retention.  e
coverage is expected to provide protection for a storm that generates in
excess of approximately $310,000 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-identi 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 di 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 of December31, 2011, the Company had not ceded any losses
to Ibis Re.
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.
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 su cient
equity at risk to allow the entity to  nance its activities without additional
 nancial support or in which the equity investors, as a group, do not
have the characteristic of a controlling  nancial interest are referred to
as VIEs. A VIE is consolidated by the variable interest holder that is
determined to have the controlling  nancial interest (primary bene ciary)
as a result of having both the power to direct the activities of a VIE
that most signi cantly impact the VIE’s economic performance and
the obligation to absorb losses or right to receive bene ts from the
VIE that could potentially be signi cant to the VIE.  e Company
determines whether it is the primary bene 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
its 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 signi 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.
Accordingly, the Company is not the primary bene ciary of Ibis Re and
does not consolidate the entity in the Company’s  nancial statements.
On January30, 2012, the Subsidiaries entered into two reinsurance
agreements with Ibis Re II Ltd. (“Ibis Re II”). Ibis Re II, incorporated
on December2, 2011, is an independent special purpose reinsurance
company domiciled in the Cayman Islands.  e Ibis Re II agreements
provide up to $130,000 of reinsurance coverage for protection against
losses over a three-year period from individual hurricane events in the
United States and Puerto Rico.  e agreements expire in February